Tempting, But….

Today ended a volatile options expiration week with a big up day (volatility doesn’t just mean going down).  In the last couple of days, we’ve seen some of the biggest companies in the world report earnings better than most expected.  Google led the way with the biggest surprise.  The stock was up $90, almost 20% today!  Bloomberg reported some out of the money options were trading at $.10 last night.  So, you could buy 100 contracts for $1,000.  Today, they were worth over $17.50 per contract.  That’s a 17,500% return.  That’s not a misprint.  $1,000 turns into $175,000.  Now, that’s a nice day trade.  And no, I didn’t make that trade in case you were wondering if I was bragging.  It shows you the power of leverage and how options can increase returns at times quite a bit.  Of course, had Google reported weaker earnings, that $1,000 would’ve been gone in a flash.  So, it works both ways.

But, getting back to the earnings of other companies.  So far, they’ve surprised me that they’ve been so good.  Of course, some of them just “weren’t as bad as we thought”.  That’s what we heard about some of the financial earnings like Wells Fargo, JP Morgan, & Citigroup.  I think the worst is over for these companies.  The stocks have probably bottomed as well.  I don’t feel that way about other non-financial stocks.

I mentioned on Biz Radio last night that today would be a good test for the markets.  They had every reason to rally and rally hard.  On the surface, they did do that.  But, it failed the test.  The volume was weak and the internals were even weaker.  There was tremendous evidence today that the rally was due to the sellers taking a break, not the buyers taking charge.  Light volume, options expiration, and a little bit of good news.  That’s the making of a sharp increase.  But, I’m afraid it’ll be short-lived. 

I feel like I’m on an island right now.  So many are turning bullish.  The confidence is reaching an extreme level.  It’s really hard emotionally to not jump on board this train.  It’s so tempting.  But, my discipline is more important than my emotions.  I’m staying flexible and on up days like today I’m still making reasonable money because I own a lot of stuff going up right now.  I own the ag, the tech, some of the financials, but I also own some short positions which keeps my protected on the nasty down days.  My game plan going forward is to sell some stocks that have advanced here recently, short more, and potentially buy some materials stocks that have sold off in the last few days.  There’s been a slight rotation from materials and ag into financials and technology.  This may go on for a while but only for a while.  I think this is a floating market.  It’s investors that are negative on the market pausing.  In other words, the short sellers are locking in profits looking to re-establish at higher levels.  There are also those investors making short term trades (swing traders).  What’s missing are investors rushing in as if the train is leaving the station.  I’ll buy it at whatever cost.  That’s not happening now and I still need proof that it’s happening before I dive in.

Well, I’m on my way down to Rockport, Texas for a weekend of relaxation.  My kids love fishing.  They’ll sit there all day and just fish off the dock.  I’ll do a little fishing and catch up on some reading.  The weekends is when I get caught up on reading most of my research reports and data that comes in during the week.  It’s so much that I have to just put it off until the weekend.  I’m currently reading “The Black Swan”.  It’s a book about how to prepare for the unknown rather than wasting energy, money, and time preparing for the known.  Not sure how to do that but we’ll see how the book progresses.  Also, I’ll be watching my Spurs tomorrow versus the Phoenix Suns.  That one is sure to go 7 games.  At least the Spurs have home court advantage.

Have a nice weekend.


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April 2008
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