TJ's Take » A Global and Urban Flaneur

It’s very simple.  Folks talk about these 10 (that’s right, I said 10) things being the reason that we are in a correction:

• Europe is screwed
• China GDP shows hard landing and slow growth
• Spain bond auctions are not being supported anymore, Italy is next probably
• USA Weekly claims that were once dropping to 340k per week are now back up to 380k and 20k from the 400k level
• Gas prices are now approximately $4 across the board of the USA
• We have had a NBA stock market .. “nothing but Apple” (insert Priceline as well , PCLN)
• Our 10 year yield broke back under 2%
• There is no LTRO 3 coming (so they say)..this was Europe version of Quantitative Easing (QE)
• There is no QE3 anytime soon (Ben Bernanke has told folks that)
• The world is slowing down #growth

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All those things are true folks. But even so those things are true the market rallied in the face of those things building there is one thing from my list above that stands out that will tell me how long this correction in the stock market will last a.k.a. how deep it goes.  Look….If you think Ben and Obama WANT GAS PRICES THIS HIGH to get re-elected then you are delusional.. OIL prices have not brought down $ @ pump!

That’s right.. this correction in the stock market, during an ELECTION YEAR will all be tied to the price of GAS at the pump. Nothing else.

• China – who cares, they make up their numbers anyway to get lower costs of commodities to stock pile
• Europe – sure, they are screwed.. but that has been discounted in the market already for all of last year
• 10 year yield – ok, it broke 2%, who cares, when it was at 1.9% last year the market was around 1200-1250 S&P (SPX).. our market is now at 1370 !!! S & P

I can go on and on but let’s get back to GAS prices at the pump.

1. It affects consumers
2. It affects shippers
3. It affects margins
4. drum-roll….. IT AFFECTS VOTERS DURING AN ELECTION YEAR !!

So when you have a state, let’s say North Carolina, that has gas at $3.15 to start off 2012, and by early April the price at the pump is $3.95 .. YOU DO THE MATH.

This correction in the stock market will be tied to the price of GAS at the pump, don’t get it twisted, don’t let nothing else fool you. When the gas price has say returned to say 1/2 way then you can assume it’s nearing completion.

Or you can view sentiment. We had historical bullish sentiment in February. However, the market took 6 more weeks to TOP. well, whenever Bearish sentiment gets to the 56% range, sure we will get relief rallies, but the mkt may not bottom for 6 more weeks.

So … just like it was hard for bears to cope with a multi-month bull market. the same can go in reverse when it changes. What do you do, here are bullish and bearish trades to consider:

Bearish:

• Short the banks, earning were not great and should deteriorate for the remainder of the year – DB, BAC, et al
• Short the Russel (small caps index), IWM, with inflation this high small caps have more trouble dealing with it than Large caps (for instance inflation doesn’t hurt a company like IBM as much)
• Use calendar spreads or simple put spreads when buying puts
• Buy volatility ETFS by using a Buy-Write-Ask strategy+ covered calls strategy …whenever the VIX takes a pause but doesn’t go below 17

Bullish:

• Sell OTM put spreads in Apple (AAPL) as it is dipping now. Apple gets the first money from dip buyers so as you play bearish plays this will take heat but should pay off more often than not. If you wish to play earnings on the bullish side use calendar spreads, e.g. sell april $635 calls but buy may $635 or $645 calls or even butterfly calendar spreads, very unique.. I will go over them in chat on monday.
• Buy Utilities with good dividends or even consider Verizon (hey, they are not going away and it has over a 5% divy and will sell more smart phones)
• Sell puts or put spreads in UUP (US Dollar), flight to safety
• Play smaller time frames (2-4 hours in day trading or 1-2 days) and look for MoMo (momentum) names that have a very high short float and have earnings coming up when you see them bouncing…e.g. NETFLIX 17% short float .. it can get hit but the odds on your side of a short covering rally at any moment before earnings.
• Look at stocks that will perform better in a volatile environment (like Dollar General, DG or Family Dollar, FDO)

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For specific trades you can be with me at NWATrading.com as a member to ask questions about trades you wish to do, trades that I am looking at, how to play weekly volatility in that kind of environment as a hedge! We are retooling the community to be more educational focused over the new few months.