Friday, April 18, 2014

38-5 for April, calling the top?

38 Winners 5 losers for the April option cycle. Grade B-. Most profitable month of 2014. Stock market was choppy. Winners include AMGN, IWM, VRX. I sold nine layers of IWM options, five layers of puts, four layers of calls, on the Russell 2000 etf and all came in safe. I took big losses in GILD, UAL, UNH. Had I held on to my losers, it would have worked out, but the draw downs were deep. The bears had one week in the sun, but for the most part, the bears got slaughtered during expiration week.

My profits for the year inch ahead of commissions paid. Any green during this difficult year is welcome, so I'll take it. As always, before any readers get excited by the high win percentage (38-5), those are the approximate odds going in. I tend to sell options that have about a 10% to 20% chance of coming into the money, so 80% to 90% of the time I win. However, some of the losses can be for huge percentages--that's why speculators buy those options, hoping for a 5-to-1 or 10-to-1 payout.

About market tops, it was about a year ago that I posted a Storm Warning for the stock market based on valuations (link). The stock market is up over 20% since that warning, again demonstrating the cliche that valuation tends to be a poor tool for calling market turns. More useful indicators include chart patterns and sentiment. Both charts and sentiment say there remains a good chance for many more sunny days to come. 

The terrible bear market of 2008 has scarred a generation of investors. So much so, that there is still a large group that has never come back to the stock market. The recent buzz about high-frequency trading doesn't inspire confidence either. I often hear chatter from various folks, along the lines of: the stock market is rigged and that they want no part of it. Does a major top have to come with frothy sentiment? No, no indicator is 100%. In any case, a major top is unlikely without a major correction in the 10% to 20% range before the big bear shows its claws.

As I have often written, calling top is a low percentage game. The higher percentage is waiting for a top, and shorting the rally failure. It isn't so easy to do this easier, but the odds are better than calling top. There have been a rash of articles and chatter about a replay of 1929, or 2008 or 1987. Investors still tend towards the cautious side (I almost always tend towards caution). Crashes rarely happen when so many are cautious, and so few are giddy.

The Fed wouldn't let a full on crash occur without major intervention. The Fed has distorted most markets, most especially the bond market with quantitative easing. What is surprising to many is that bonds are the best major asset class for 2014. 

The old cliche is "two steps and stumble," meaning two Fed interest rate hikes then a stock market decline. The earliest Fed tightening guess is late this year. However, the new Fed chief Yellen hinted at 2016 or later for a hike in Fed rates. Again, nothing is written in stone. At some point, I still believe that being short U.S. bonds will be the trade of the century. However, the timing is up in the air. Again, sentiment and charts may be helpful for timing.

As for gold, the upward bias of 2014 continues. My recent small trade in gold is still open and so far is right down the wide middle for profit. Again, I tend to like to sell options and the premiums on options on gold and bonds are tiny, and the margin requirements steep. This makes it hard to justify selling premium on GLD or TLT or similar.

Position summary:
long AMGN BA DAL HON HPQ MSFT SLB UAL UNH VRX
net long APC ASH DIS IWM SPY
short GILD

No comments: