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Well we finally hit our levels!
Fundamentally, I still don’t buy this rally but, technically, we could go up and up from here. We discussed in chat yesterday how we may be in a pattern similar to 2003-7 where we came out of the dot com crash and 9/11, which took the market lower than it should have and then government stimulus took us higher than we should have been. Sure it all ended badly but there was a really good ride up in between. HOWERVER, 2004, which is about where we would be now, was a choppy and downtrending year. That is not a problem for our buy/write strategy as long as we keep our heads and scale into our positions.
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Obviously we can’t rely on patterns to simply keep repeating themselves. We could have another terrorist attack, we could have more stimulus or maybe both in our future but, until we see the patten broken, we can play for a similar move. Our buy/write strategy is ideal for this as it’s a conservative play that gives us 15-20% downside protection. Combine this with our usual strategy to scale into positons along with some sensible disaster hedges and we can build a nice, bullish portfolio for 2010. Keep in mind we don’t fear the upside with buy/writes as our “worst case” there is we get called away with a nice profit.
I put up our latest Watch List on Dec 22nd, following through from our bullish lists of September 6th, October 8th and Nov 24th. These are the bullish plays that form the bulk of our portfolios and that sometimes gets lost in our weekly short-term trading. It was a lot like shooting fish in a barrel, picking winners since September (we had our last Buy List on July 11th our first since the bottom in March, which was followed by the more conservatively mixed $100K Portfolio that we used from April through July, when we were worried the market would be choppy (it was).
We did very well BECAUSE we took well-hedged positions and scaled in slowly! Changing a Watch List to a Buy List is a big deal as we are saying (and this goes for as long as we hold our breakout levels) that we are confident in these positions long-term and are willing to add to them on the dips. I have been reluctant to switch signals until we actually broke though and, while I am still doubtful and will remain cautious through next week, at least now we have a clearly defined floor to warch (Dow 10,549, S&P 1,135, Nasdaq 2,314, NYSE…
