Good Friday

The week left off on a very good note both financially and personally. Financially I recouped yesterday's losses plus some more.

Trading wise it was fairly boring as expiration went out pretty quietly with stocks getting pinned and held early to their appropriate strikes that will make the market makers the most money. I followed my plan to buy back my short AA options into weakness which worked out very well. I actually ended up with a small profit and was able to buy them back near the lows of the day. After I closed that position I was pretty much content to just sit and watch things unfold. USO moved up, the IYR moved down, MFE was flat. My PALM and POT positions were far enough away from their strikes that my short options did not move in value. In the end, all of my remaining short options expired worthless which has a double benefit because I will get to collect the remaining premium and don't have to pay commissions to buy them back. By tomorrow the rest of the profit should be reflected in my account so I just added it onto todays gains for my return calculation.

Going into next week I'll be curious to see how the market acts. Both Bank of America and Citigroup reported better than expected results. Citigroup came in with a large profit when a large loss was expected so I wondered what kind of accounting standards they were using...turns out all their gains came from their sale of Smith Barney, not actual business activities. CIT is apparently in talks for financing from GS and JPM, oddly coming the day after the government said they would not help and the bond prices collapsed further. I understand it is a business but it seems kind of shady depending on how things happen. It would have been extremely easy(and highly illegal) for GS and JPM to buy bonds and sell CDS's or just gone long equity knowing full well they were going to help. Theoretically there should be a firewall in place to prevent this type of thing and maybe they just waited so they would be able to get higher rates of return on their financing but it makes you wonder about some of those business practices, no wonder their profits are so large! One of my friends said "you knew you should have gone long CIT!" I had that inkling too, however I said I'd rather deal with companies that don't have the possibility of going bankrupt because there is no reason to take on that excessive risk.

All conspiracy theory and unethical behavior aside we are at a precarious point in the market I feel like. This MAY be the point where the market is starting to look towards a recovery by the end of the year or early next year and so far the cost controls and expense cutting of companies definitely improved profitability and outlooks. As we know upside earnings surprises are the main driver of stock price appreciation as analysts re-value their models and people are willing to pay higher multiples during times of expansion. I read a research report from Goldman on commodities that essentially reflected my own sentiments. They actually had specific trades using futures that they recommended putting on which got me wondering how I would perform if I decided to put them on myself. I will use equities and options to carry out my own view. One stock of note I just looked at yesterday is ADM which has a massive inverse head and shoulders pattern. If I see it then so does everyone else making the self fulfilling prophecy possibly more profitable once it confirms. I would actually like to see some pull back and I will look to get into it.

I still struggle with the divergence of my opinion of the economic fundamentals and what is happening in stocks. The economy may be getting less bad but isn't really improving much, unemployment is still getting worse, financial companies are setting aside more loan loss provisions and if people have no jobs how will they consume and if GDP is 70% consumption...I could go on for a while. This is countered with recent price action and the apparent known "fact" that stocks bottom and head higher much before unemployment rates improve. The S&P 500 also gets cheaper on a valuation basis as earnings outlooks get revised upwards.

I have to assume we pull back at some point here soon because we have moved 7% in a week essentially and the McClellan Oscillator is nearing overbought territory. If we happened to have a gap higher on monday I feel like it would be a good opportunity to short into. If we work off this overbought condition and get above 950 on the S&P it points to more upside. Going off of technicals theoretically a test of around 910 should now be bought so that could help put a floor under stock prices. If FCX pulls back to the 50 level I will be a buyer and I am contemplating a longer term strategy with a synthetic stock position going long a call and short a put because ultimately I feel the direction is up.

Total Return for 2009: 156%