I'm still waiting to fill my order to buy Sun at $3.40. The stock closed last week at $3.49 after getting as low as $3.45, but hasn't made it down to my buy price yet. This morning, the market opened higher and Sun rose to $3.56 in early trading. If the market takes a sudden wash-everybody-out spike downward, I want to benefit. That's why I've set the price on Sun so low. Buying at $3.50 would be fine, I'm sure, but I still think we can save the extra dime.
If it's all up, up and away from here, we're positioned well for that, too. My decision to hold on to Ultra Semi rather than sell it at a small loss a month ago is looking wise. While we closed last week down some 9%, that's well off the lows of the past couple of weeks and the fund is reacting nicely to any upside technology moves -- by design, of course.
The place where the more conservative among you might want to put money to work is in Double The Dow. That investment is down 12% so far this year, but has a remarkable history of recovering from such situations. In fact, that's how the Dow works. It's made up of the world's strongest companies and the best way to profit from them is to buy when they're down. Value investing works against such large, well-established firms. Anytime you can get in at a 10% discount or more, staying for the long haul has proven profitable. You can track my Dow investments on my Strategies page.
If you've read my stock book or visit this page on a regular basis, you know that I've recommended Budweiser brewer Anheuser-Busch on several occasions. I was pleased to note that the legendary Warren Buffett has finally taken my advice. Anheuser-Busch announced last Thursday that Buffett is now a major shareholder. Talk about being in good company. You can learn more in the BusinessWeek story.
My old tried and true swing trade, Sun Microsystems, is back down around $3.50 again. The stock has worked wonders for me between about $3.50 and about $5.50 over the past few years, and I see no reason why it can't do so again.
That was fast. I closed my entire XLBRD position at $1.40. That's a gain of 27% since buying it last Tuesday at $1.10. If you were able to buy it last Friday at $0.90 and sell it today at $1.40, you gained 56% in four trading days. No matter where you bought it, this was good work in a short time. Enjoy it. As always, I've recorded my result on my Strategies page.
We got that spike in XLBRD that I wrote about over the weekend. It went from a Friday close of $0.90 to $1.45 today. I put in a limit to sell at $1.40. I'll let you know if it fills.
The bad news is that my puts on S&P's Basic Materials ETF, symbol XLB, ended the week down some 18%. The recent mini-bull market lit a fire under nearly everything and took the ETF to just above $30.40. On Friday, it took a steep dive down to $29.99, a penny below the option strike price of $30, but that wasn't enough to put us positive yet.
"My, my," I can hear you muttering, "down 18% in a few days. What's gone wrong with Jason's normally conservative approach?" The answer is that this is not my normally conservative approach. As I mentioned in my April 5th post explaining my reasoning, options are very risky and if you don't understand them then you should skip this investment. Puts on XLB is an aggressive way to profit if prices of basic materials companies retreat before June 17th, as I believe they will. Options fluctuate more widely and quickly than stocks and mutual funds. If XLB continues Friday's downward trajectory, we should see this position move solidly into the black quickly, from minus 18% to plus 18% and higher, one hopes. There is absolutely no guarantee, however, which is why you need not feel bad for letting this idea slip right on by. Options are not for everyone and should be used only with money you can afford to lose.
That said, here's to hoping we don't lose and why I think we won't.
First, if you're slow getting to your email these days, then you have a chance to buy the contracts 18% cheaper than I paid. That's a free service I've been offering a lot around here lately. I suggest buying something, then I buy it, then a week later you have the chance to buy it cheaper. Happens on the sell, too. I say to sell Maxtor at an average price of $5.35, then you have a chance to sell it at $5.66 within two weeks. Who says procrastination never pays?
Back to those XLB puts. One reason you might want to take advantage of the price being cheaper than what I paid is that the chart makes XLB look ready to move lower. Reminder: puts gain as the underlying security goes down. If you needed that reminder, don't pursue this investment! Notice on the 3-month chart that the first real support is around $28. The 6-month chart gives us secondary support at around $26.
Another reason to expect lower prices is that analysts are souring on commodities across the board. From Briefing.com's Friday market wrap:
Energy (-1.6%) was the weakest of the 10 losing economic sectors, amid oil's fifth straight day of declines, while Materials (-1.4%) was a close second... The latter was dragged lower by a sell off in Steel (-3.4%), spurred by a downgrade on U.S. Steel as well as analyst comments about declining prices, a reversal in earnings momentum and a potential global supply demand imbalance.
This is precisely the short-term trend that I'm trying to grab here. I reiterate that I believe the long-term trend is for higher oil and commodity prices, but the short-term should see lower prices and thus a gain on the put options.
Just what companies are we talking about here? XLB's top ten holdings include Alcoa, Dow Chemical, DuPont, International Paper, Monsanto, and Newmont Mining. Only Alcoa gained on Friday. The rest dropped, and contributed to XLB's 1.45% drop. Here are current quotes for the top ten holdings.
With last week's general market rise we saw an improvement in Ultra Semi. The position rose a bit and is now down just 3.2%. With a little help from the oft-predicted but as-yet-unseen rotation away from energy stocks into chip stocks, we should finally get back into the black and be able to sell at a profit before summer.
Speaking of summer, it can't be far away when Japan is in hanami season. A hanami is a drinking party under the cherry blossom trees. It actually marks the arrival of spring, but the weather is so warm and sunny that it feels like summer already. The blossoms are in full bloom this weekend around Sano, where I live, and I partook in the spring tradition of eating and drinking myself silly under their pink canopy. Here's a photo I took of the hanami with koi flags in a nearby city called Tatebayashi. Within walking distance of my apartment is Sano City's Shiroyama Park, where I took this photo of people painting sakura.
I hope that you're enjoying spring wherever you live.
I've been writing a lot lately about lower stock prices ahead. I sold positions last month and am looking for a good price at which to get out of Ultra Semiconductor before summer.
I'm going to go one farther now and bet on those falling prices. Being in cash is a way to protect against declines. Shorting stocks or indexes is a way to profit from declines.
In this case, I'm targeting commodities. The financial press has been buzzing for the past two years about how China is eating up the world's resources and about the coming war between America and China over oil. Jim Rogers, the famous international investor, even created his own commodities index and it has been a top performer. Oil is up, raw materials are up, everything needed for building seems to be up.
As you know by now, when things look rosy all around, they're not. That's why I began thinking about investing contrary to this long-term trend. For the record, I, too, believe that commodities represent a good long-term investment. But as I exited Sun and Maxtor and UTStarcom, I began looking elsewhere for trends and a short-term trend I found was that commodities appeared to be getting ahead of themselves. Then, yesterday, I received a note from my friend Dan Denning at Strategic Options Alert in which he suggested the same thing. I respect Dan's judgement, and that note was the tipping point on this investment thesis. I decided to short commodities.
Dan feels, and so do I, that the best way to do so is to buy puts against the Materials Select Sector fund from Standard & Poor's, symbol XLB. In the last two years, XLB has moved from $18 to $30. Take a look at the chart.
Puts are options that rise when the underlying security falls. Buying these puts is similar to shorting the index, except that options enable you to leverage more financial power with less money. I have not yet written a book about options and I rarely suggest options here. If you don't know about them, please spend some time reading up before making any moves. If it's too confusing, sit this one out. I'll provide plenty of mutual fund and stock recommendations in the future.
I've placed a limit order to buy the XLB June $30 puts (XLBRD) at a price of $1.10. They've been bouncing between $1.10 and $1.25. I hope a quick spike down will give me the better price. If XLB falls to the high- or mid-20s by June 17, we'll see a nice profit on these puts.
Remember, if you don't understand options, then sit this one out.
I continue looking for opportunities to get out of this market before summer is fully upon us. This year is following a familiar pattern so far. It knocked a little off the winter rally in January, then in February gave us back more than it took away, was mixed in March, and now seems poised for the usual trouble heading into summer.
I've long said that high oil prices are going to be a major weight on the market. That widely accepted thesis is playing out. I don't like having so many people agree with me, but sometimes the crowd is right. If you're having a picnic at a park and the sky turns black with clouds and many people run to their cars for umbrellas, wouldn't you do the same? Something like that is happening with rising oil prices. Everybody sees them and a lot of people are running for umbrellas by selling stocks. On Friday, crude oil futures surged 3.4% to $57.27 per barrel, and that was on top of Thursday's 2.5% advance. People are covering their short positions and speculating that refining capacity may not be sufficient to meet growing demand for gasoline ahead of the summer driving season. That's precisely what I've been watching for.
In preparation for summer's expected lower stock prices, I've been backing out of the market. I sold Sun and Maxtor last month. If you didn't get around to reading your email or this page until now and therefore didn't sell when I did, don't worry, Maxtor is now slightly above my average sell price. The market is proving once again that it likes you more than it likes me. My average sale price was $5.35. Maxtor closed Friday at $5.40. I'll take comfort in the old adage that you never go broke taking a profit (up 65%). You can take comfort in beating me at my own game.
I'm still itching to get out of Ultra Semi at a small profit, but the market is not helping. We had a nice gain mid-week, but then dropped again on Friday and are now down some 4.5%. Light a candle and hope semiconductors suddenly surge upward before tanking over the summer. If they keep creeping down, I'll have to take the loss at around -9% or so.
How about that UTStarcom? It closed Friday at $10.92, nearly 28% below our Feb. 11 sell price and 70% below the price at which Kevin Landis of Firsthand Tech Value suggested buying it at the beginning of last year. Whew.
As usual, the pundits are evenly divided over whether we'll see a rally or a crash in the near future. I'm on the side of caution, as you can see by my gradual backing away from the market. I think the bearish case was summed up nicely by Barry Ritholtz at TheStreet.com. If you have time, read his article. If not, just remember that the advance/decline line is softening, good news is being seen as bad, the economy is weakening from its previously-perceived position of strength, and...
Lastly, look at what's been occurring in the dollar, gold and oil. The countertrend rallies in these areas are of a short-term, corrective nature. They can run long enough to sucker in traders, but once they resume their prior trends -- dollar down, oil and gold up -- many players will get caught leaning the wrong way. They will be desperate to stop the pain, and that will exacerbate the selling in equities.
This is not bad news for people who don't own equities, or at least not too many shares. For those with cash, it's going to be good news. And that's why I'm backing away from stocks, into cash, same as last year and the year before.
