Saturday, June 21, 2014

34-5 Grade C+ underestimated the rallies

Thirty four winners, five losers for the June option cycle, grade C+. The rallies in gold and stocks were stronger than I anticipated. My trading account is up nicely for the month, but I lost some potential by selling calls and having to cover for big losses on the rally. 

As always, don't get excited by the high percentage of winners. I tend to take high probability trades where the profits are low. Those buying 10% chance of profit options are hoping for a 10-to-1 payout. I tend to take the other side, so the profits are tiny, the losses potentially large.

It is almost half way through the year. For calendar 2014, Amgen AMGN and Valeant Pharma VRX continue to be my two best trading stocks. The Russell 2000 IWM, Ashland ASH, Anadarko APC, Disney DIS, Gold GLD are some more winners. Losers for 2014 include: Gilead GILD, Boeing BA, Toyota TM, United Continental UAL.

Reviewing the signs of a stock market top (blog entry link1), none are present. The American Association Investors Intelligence (AAII) sentiment bullish reading is at 35%, dropping nine percent on a slight downturn last week (link2). Federal Express led the transports higher in a huge up week. Yield curve remains bullish. (An inverted yield curve, is the major warning sign of the bear, wiki link3.) While stock advisers are extremely bullish, the rank and file investors remain skittish, with many turning tail on a small decline. There was a recent article about stock ownership as a percentage of population being near record lows in the U.S.

The bearish argument includes valuations as measured by the Schiller PE10 or CAPE (ten year average of price earnings, wiki link4), record levels of merger activity, record levels of margin debt, some froth in certain sectors. The larger question is will there be time to get out when the bear comes? Odds are heavy on the yes side. There is almost always a warning shot correction, an oversold technical rally, before a big bear market occurs. The worst losses may tag those that buy that dip thinking it is finally their chance to get in, after missing most of the five year bull move.

The elephant remains the Fed and other central banks. While the Fed is tapering, the European central bank and Japan continue to pump money in. The bond market seems to have disconnected from forecasts and interest rates continue to be near record lows, despite open talk of short term rates going to 2% and then 4%. At some point the bond market prices this in. When will that be? Will it be an orderly exit? Or a mad rush? I don't know those answers. For timing, sentiment and charts tend to trump fundamentals. There have been so many calls of a bond market top, I side with the advice of "don't fire until you see the whites of their eyes." In other words, don't move the money (out of bonds, or to short the bond market), until there is clear evidence of rising rates.

As for gold, I am not that excited by the sharp rally this week. Short, sharp rallies often occur during bear markets. The strength in the gold mining stocks, GDX, is a positive, but it needs to continue for a while. Time and price are needed as evidence for the market to have turned. U-shaped chart bottoms tend to be rare, even though we did see a big one in 2009 in the stock market. I am not in any hurry to buy gold or silver. Whether an intermediate bottom has been found, only time will tell. At this point, I believe lower lows are likely. My money is still on a trading range for gold (short strangles, net neutral). Rising interest rates increase the costs of carrying gold.

Position summary:
net long DIS
net neutral DAL GLD SPY
net short IWM

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