Monday, January 31, 2011

Tomlin's call, 401k mistakes

Some random thoughts for a calm market Monday, after the frantic Friday.

Adam Warner breaks down odds the way option traders often do, for Steeler's coach Mike Tomlin's call against the Jets (link1).
So you’re the Steelers, you have the ball on the Jets 40 yard line, and a 5 point lead . There’s two minutes left, and the Jets have no timeouts. What do you do? ...


Roger Nusbaum cites a Barrons article about how poorly most Americans are preparing for retirement (link2).
... people are often their own worst enemy when it comes to their finances and portfolios for things related to poor spending decisions and occasional panic selling or panic buying.

This is something I write about often. In theory, with hindsight, any person can pick tops and bottoms and imagine the vast returns that might have been. In reality, the average punter makes bad decisions, often very bad decisions.

On the Internet, you will mostly read reports about profits. Some reports are real, from exceptionally talented (or lucky) traders, the top 1% or 5%. Some are selective memory (mis-remembering so a 10% return becomes 30% when the story is told). Some are hindsight traders that only report their winners, and only after the trade is done, never in real time, so they never have to report a loss. A few are liars, fabricating their entire story. Understand the nature of reporting when reading message boards, so you don't feel left out. Exceptional returns are exceptional, but if a person only reads investment boards, you'd think everyone makes big money.

That's why, for the average investor (not trader), I have always suggested that being average is a fine thing. Getting an average price when buying or selling, seeking an age appropriate asset allocation as far as strategy. That kind of averageness, especially for those searching around for advice, tends to be better than making drastic all-in, all-out decisions that get the attention.

Thursday, January 27, 2011

Lewis: GLD signaling a bottom?

Lance Lewis has an article at Minyanville, looking at a potential bottom on GLD (link).

The GLD gold ETF puked up 31 tonnes (or 2.48% of its bullion holdings) yesterday to bring its holdings down to 1,229 tonnes.

Now, a bullion puke of that size is interesting, because as we’ve noted before, one-day declines in the holdings of this ETF of over 1% have tended to be capitulatory in nature and have typically occurred near important lows in the gold price during gold’s secular bull market.

Lewis also writes about rumors of a leveraged hedge fund coughing up most of this gold. As with most rumors, the little fish, rarely get a version that is anywhere close to the truth, in a timely fashion.

As always with oversold markets, oversold readings can become oversold-er. The bigger question to me, is whether the major uptrend is intact. If it is, then this is an opportunity to add to longs. However, as Lewis notes, only after the fact will traders know for sure.

I don't this is an intermediate or long term top because sentiment tends to get much frothier at major tops. Gold newsletter timers, small time gold investors are still relative cautious. Bold bullishness in the face of a decline is the typical reaction when the trend changes. Instead, I observe folks taking profits, and/or shy about new long positions.

Weighing against this is flat to down seasonal tendencies for gold into February/March. The recent highs are significant resistance, limiting potential upside. For the other markets, Feb can be risky for stocks, bonds tend down into a bottom in May. With the caveat that I find seasonality tends to be one of the weaker and less reliable indicators.

Long GDX, GLD, TBT (short puts)
Neutral SPY (net neutral with a three-leg option position)

Friday, January 21, 2011

5-0 for January

Five winners, zero losers for the January option cycle. Two winners in SPY, one each in GDX, GLD, TBT, all short puts. That's the good news. The bad news is that several of my open positions for February are under water. My short GDX options are down over 130% on a notional basis. My long SPY vertical put spread is down about 70%. Fortunately, while the percentage losses are frighteningly large, the dollar amounts are relatively small.

These past few weeks have been tough sledding. I have been mostly wrong on market direction, and relatively poor on timing entries. The baseball analogy might be fouling off several pitches, scuffling, staying up at the plate, working to regain that smooth and near effortless swing.

As I often write, when a trader reaches the inevitable cold spell, or losing streak, often the best thing to do is to trade smaller, simplify the analysis, and get back to basics.

Buy TBT (sell puts)

Buy TBT via selling Mar 34 puts, TBT @39.7. I open a March position, as my Jan 30 puts expire. I already am short TBT Feb 33 puts.

Neutral SPY

Thursday, January 20, 2011

Learning to trade

At a recent ThinkorSwim chat, the comment was made that a trader has to do live trades, to really learn how to trade. The New York Times has an article about test-taking vs. study and retention (free registration may be required link). The study concludes that students that are immediately tested on material remember it better than those that either just study or study and take notes.

As always, what works well for one person may not work so well for another, so there may be some folks that do better using the other methods. I tend to focus on the average experience, what the average person can expect, not the top 5% or top 1%, so for the average person it is likely that trading real money (taking the test) is going to be the better path to learning.

There are a lot more caveats to my analogy, but I thought it interesting to draw the comparison.

As for the markets, GLD, GDX, TLT fell out of bed today. GDX and TLT are at short term support. We'll see if support can hold. With time, delta and gamma moving, I am now net neutral on SPY. None of my short January options that expire tomorrow are in serious danger of coming into play.

Neutral SPY

Wednesday, January 19, 2011

Ritholtz: Why Blog?

Barry Ritzholz writes about the reasons for blogging (link).

1. You have something to say

2. You enjoy the craft of writing

3. You want to figure out what you think, and do so in public

4. You want to be part of a larger community of like minded individuals

5. You have a hobby or interest that you are really, really into

6. You want to maintain a presence on the Intertubes

7. You have an expertise and you want to share it

8. You have an eye for content (text, graphics and video) and you enjoy leading other people to them

9. You want to create a permament online record of what you are reading, looking at or thinking about

10. You like engaging in debate with total strangers

For me, public blogging helps clarify my thoughts and motivations for entering or exiting a trade. Being publicly accountable, also seems to temper my emotional reactions. The old cliche is that by sharing knowledge a person increases their knowledge.

Things I have purposefully avoided are controversial topics such as politics. That is one reason that I get very little feedback on my blog. That is fine with me. Arguments, especially petty arguments are a scourge on the Internet, and in most cases shed very little light, and generate a lot of heat and anger. I've seen folks get bent out of shape over the most minor of issues and it costs them their mental health and sometimes physical health.

This blog started in February 2006, so it is almost four years now, with 930 posts. My trading and my results have improved. I don't post every day, which means I don't have as many readers as many other blogs. As a relatively slow moving position trader, I don't always have something interesting to say, and I don't always have time to blog.

I thank the regular readers, and I hope that some of the posts have been useful if not enlightening. Cheers.

Tuesday, January 18, 2011

Strike two

I am counting today's stock market action as strike two (three strikes and the bear will come out to steal some picnic baskets). Stock market bears were likely licking their chops, when the news about Steve Jobs and AAPL came out. AAPL went down 7% in overseas trading, but is now only down about 2%, with the broad market moving up.

Earnings will be a huge factor in how the game is played out in coming days, but active bears have already been skewered--their visions of a big down day dashed again.

I came into the year long gold, short bonds, short stocks. For now it looks like a whiff on gold and a whiff on stocks. Fortunately, my gold positions were of the low conviction variety, so have weathered the mild downturn.

Not so much my SPY bear spread, as that has lost 60% of its value. When the stock market opened the year with a strong rally, instead of the decline I was looking for, I quickly hedged the Feb put spread, by selling January puts. That action saved the bacon, getting me to about at break even for SPY trading despite being so wrong at the gate.


Wednesday, January 12, 2011

Buy SPY (sell puts)

Buy SPY via selling Mar 105 puts, SPY @128.3. This brings my net position to ever slightly long. My bearish Feb vertical put spread was ill-timed. I quickly hedged by selling Jan puts and that brings it to about break even. The stock market remains overdue for a 5% to 10% correction, so I don't want to unwind the Feb position. A bigger 20% correction seems unlikely, as money continues to flow into the market.

As for gold, Hulbert reports a positive sentiment environment for gold bulls. At a minimum, it means there are buyers at lower prices (link).

Bonds continue to churn, and my play continues to be to sell rallies by selling puts on TBT. I may evolve to a short strangle by selling puts on TLT on further weakness.


Saturday, January 08, 2011

My current thinking

For stocks, the recovery off Friday's lows showed the bears that the bulls still rule the town. I would count this as strike one. The SPY chart shows remarkable strength. Still, the move is extended, sentiment is poor.

For bonds, it looks like TLT (chart2) is trying to find a bottom in the 90 range, after a sharp correction. I would prefer to be a buyer at slightly lower levels, and will continue to short any rallies.

For GLD (chart3), there are three failures at the highs, on declining momentum. That isn't good news, and the highs now represent significant resistance.

On a "third strike" for SPY, I will look for bearish plays. Right now, it is only strike one, and that may disappear if the bulls can make new highs on good volume. For bonds, the sentiment has turned, but so has the trend. The QE2 may mark historic highs in the bond market. The analogy is when central banks were selling gold, marking major all time lows in gold. Now, the Fed is buying bonds.

For gold, last year's 30% up move means that some digestion is likely. A continued strong up move after that kind of run tends to be unsustainable. A new base in the 1200 to 1400 level is one of the best scenarios for long term gold bulls.

Net neutral SPY

Monday, January 03, 2011

Buy SPY (sell puts)

I move to neutral on SPY by selling Jan 120 puts with SPY @127.2. Despite the big rally and me being net short, today's losses on SPY were tiny of time decay.

Net Neutral SPY

Sunday, January 02, 2011

2010 year in review

For those readers that may be new to the blog, I tend towards high probability, low risk, low reward trades. The baseball analogy is someone that hits for average, vs. swinging for the fences. I may occasionally take a shot, but mostly I am happy with small gains.

For 2010 in round numbers:
SPY up 13%, GLD up 30%, TLT up 5%

My trading profits ranked SPY, TLT, GLD, so I didn't take full advantage of the run in GLD. Now I occasionally short as well as go long, so at least I didn't go short heavily in this mostly bullish year.

Rounding out a few more ETFs:
IWM up 25%, BND up 2%, SLV up an incredible 84%, unfortunately I don't trade SLV

The stock market year was mostly up, with the sudden and scary flash crash in April. Precious metals had their best year in a decade, which is amazing considering this is the 10th straight up year for gold. Bonds soared and then came back to Earth, ending the year with a modest gain.

For blog reported trades I show 64 wins, 5 losses, 2 breakeven trades. That may seem like a remarkable record, but considering that many of the trades have a 85% to 95% probability of success from the get go, it is about average. One change I made this year was very few stop losses. In 2008, stops saved my bacon. In 2010, stops were for the most part whipsaws.

It is dangerous to think that the coming year will be a replay of the 2010. That said, trends in motion have a power of their own. Sentiment is one of the more useful tools in trying to trade counter-trend. The popular press is often an indicator of public sentiment.

Predictions are mostly for entertainment. Someone telling me what they are doing in terms of buying, selling or hedging is more useful to me.

Short SPY