I told you we would be DOOMED!!!
That’s right, in Monday morning’s post I said:
Unfortunately, it’s too late for the Russell, which already blew through that line and is back at 1,050, where it MUST HOLD or we are DOOMED!!!
That’s right, DOOMED!!!, and I’m not afraid to say it. Panic is in the air and the VIX hit 27 on Friday, just shy of the August high and that means people are FREAKING OUT and the markets can be very dangerous when that happens.
Now we will be watching the 1,000 line on the Russell and, if that fails – we could be looking at another 5% drop for the S&P – all the way to about 1,760 before the next time we’ll want to play for a bounce. As I pointed out in my Morning Alert to our Members, none of this is a surprise to us as we called for cashing out when the S&P was at 2,085 back on August 13th (see: Thoughtful Thursday – Contemplating the S&P 500) and, I’ve repeated it every time the S&P hit 2,100 since.
Why? Because the VALUATIONS of the actual S&P 500 components did not support 2,100 for the index, that’s why! This isn’t rocket science folks – over time, value does tend to win out over price – and certainly over Technicals… At the time (8/13), I had concluded:
Over the last year, those overseas revenues have been in rapid decline and we’re not picking up the slack at home so there is NOTHING here that justifies the S&P trading at an all-time high – especially when it’s 10% higher than last year’s trading range with a negative overall growth rate (mostly energy/commodities dragging it down).
So, upon further examination, there is no change to our stance of being short the markets at these levels which, on the Futures this morning, are 17,400 on the Dow (YM), 2,095 on the S&P (ES), 4,550 on the Nasdaq (NQ) and 1,212.50 on the Russell (TF) and, as usual, we look to short the laggard of the set with tight stops above. We also took on a more aggressive SDS (ultra-short S&P) position yesterday afternoon – as we felt the run-up was nonsense anyway – this post just confirms our gut reaction.
I don’t want to make you cry if you didn’t follow our call, but those S&P Futures finished at 1,875 and, at $50 per point, per contract – that’s an $11,000 per contract gain and the Russell Futures were good for a $21,250 per contract profit now that we’re long at 1,000. See yesterday’s post for why we are getting long here but, in reality, it’s no different than why we were short back in August – THIS is the right price for the S&P – so now we are BUYBUYBUYing at the bottom. See how that works?
But let’s not get carried away. When I say “buying,” I mean we are taking advantage of the high VIX levels to SELL premium and position ourselves to own stocks AFTER they fall an additional 20%. We do this by selling puts at prices we’d like to pay (see earlier posts this week and last for examples as well as the famous “How to Buy a Stock for a 15-20% Discount“) and we do it SLOWLY because there is no rush to jump back in when we have all this lovely CASH!!! on the sidelines.
In that video (from June, 2014), in fact, AT&T (T) was trading at $30 and we used it as an example for a stock we could buy at a discount. T is now $33.74 but, because of the high VIX, we can once again sell 2018 $30 puts for $3 for a net $27 entry, which is exactly 20% off the current price. The way that works is we get PAID $3 in exchange for our promise to buy AT&T for $30 between now and Jan, 2018. If the stock stays over $30, the contract expires and we keep the money. If it goes lower – we have our T at a 20% discount to the current price.
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