Thursday, July 03, 2014

Weekly: Will the Sky fall on the Bears?

A big push higher on Monday, followed by typical dull summer trade, then the holiday. I didn't do a 2nd quarter recap. The quick version is that stocks were up, bonds and gold are still having very good up years. I have done okay, but nothing to write home about. My weekly trade recap is at the end of this post with new longs in MSFT and XLU.
I found a sky will fall kind of article on Forbes (link1). Countering that a very bullish seasonal pattern that is soon to unfold.

The only certainty is that the more popular these crash columns are, the less likely that a crash is going to happen. This particular writer made a name for himself by calling the 2008 crisis. The old cliche don't mistake a bull market for brains may be in operation. Don't mistake one good call, one profound insight, calling the 2008 crisis, for real expertise in bull and bear markets. 

Sure some of the charts and warnings in the article are valid, even compelling. I have cited some of the same things such as the Schiller PE10 CAPE indicator. I wrote about the signs of a top a month ago (Tea Leaves for a Market top link2 and mentioned it back in 2013 link3).

The Forbes writer does some cherry picking on indicators. While some indicators are in bearish territory, many more are solidly in the average range. Selective vision tends to be the nature of fear mongering, sky is falling, points of view. 

Seeing the big picture the whole picture means the sky is falling (the financial sky will fall, but major market crashes are every 20 to 50 years (depending on how big a decline is a crash), not every five or seven years like so many of the wrong-way bears seem to think. The widely cited CAPE (ten year average of earnings) will see a big shift in 2018, because the year 2008, when many major companies reported a loss, will drop off the ten year average of earnings.

The big surprise for the mega bears might be that the stock market's ten-year pattern is about to enter its most bullish 18 months. This bull period starts September 30, 2014, ends March 30, 2016. In the middle of that, is the decennial pattern, that has year five of the decade as the most bullish of all years (Martin Pring has a good write up but the pdf will not link, search on "stock market decennail pattern, search link).

This means there is a chance that the widely forecast big banana stock market event in the fall turns into a big banana split and ice cream for everyone. With so many traders positioning for a big down move in the fall of 2014, by raising cash, buying puts, buying VIX calls, will the orderly drumbeat of the virtual army of bears turn into a panic and complete rout? Will the bears break ranks and scatter if there is yet another big rally? Will some bigger bolder bears go broke by going against the trend? Stay tuned Bat fans.

As long time readers know, I am not a fan of predictions. Predictions are mostly for entertainment, a fun game, but only have a little to do with making money. The money tends to be made doing the mechanics of trading, right sizing of positions, asset allocation, managing risk, taking losses as needed.

Some bullish arguments include an economy that may finally have some semblance of a normal recovery. The fracking oil boom means energy independence for the U.S. by 2020. Recent quarterly car sales were strong, above expectations. A good economy, might mean that every day people might have some money to spend, and businesses will do well. That would translate to higher earnings for public companies.

Most major market tops typically experience exuberance. While market timers may be super bullish, I observe fewer and fewer people paying much attention to paid market timers. Big time hedge fund managers seem to be more in the public spotlight than in the past. The people I meet in person and online, remain mostly cautious. I continue to be cautiously bullish. Some are raising cash, a few are buying puts for insurance. Yes, there are some signs of froth. The GoPro camera company IPO doubled in its first four days of trading. It is too fast a situation for me to trade. Some other big speculative stocks such as Netflix leaped to an all time record high. I am still looking for much more public exuberance before a major top is in place.

The caveat for the bullish seasonal pattern, is that seasonal patterns tend to the weakest and the most likely to be front run. For a made up example, if it is found that the market is always up on the 3rd trading day of the month, traders will buy on the 2nd day, and then the first as people spot these tendencies. If enough traders do this, the pattern becomes mush. With that, there may be broader psychological and social factors that influence the ten-year pattern because people behave differently at big milestone years such as 2000.

Another caveat is that while a major market top seems extremely unlikely, a correction of 5% to 10% can happen at any time. The recent past has been an unnaturally calm period. This USA Today article says 1000 days, 33 months, without a 10% correction (link5).

Much more natural is up and down trade. Big down days, weeks, months are part of normal action. They will come back, but their first appearance doesn't likely mean an imminent crash. If we do see a continued melt up, there might be a major top without a warning shot correction, but much more common is one or more warning shocks before the big one hits.

My weekly trading summary follows:
Thu Sell MSFT Aug 38 puts .16 @41.8. New long position in Microsoft.

Sell XLU Sep 40 puts .39 @42.5. New long position in the Utility etf, with three hard down days and decent chart support.

Tue Sell IWM Aug 108 puts @119.6. Later in the trading day, I sell some IWM Jul 114 puts @120.4. As the Russell 2000 continues to rally, I keep tap dancing, selling more and more layers of puts, rebalancing my net short position. A close above 120.6 and I cry uncle on the July 120 calls.

Elsewhere, I hold my nose and buy. I open August positions in Anadarko Petroleum APC, Berkshire Hathaway BRKB, Disney DIS, and United Healthcare UNH:
Sell BRKB Aug 120 puts @127.0.
Sell APC Aug 92.5 puts @109.0.
Sell DIS Aug 77.5 puts @86.6
Sell UNH Aug 75 puts @82.1

Mon Sell IWM Jul 112 puts @118.7. I rebalance my position in the Russell 2000 etf. I am still net short, but a bit less so. Nearest short calls are the June 120 calls. If IWM makes a new high on the close (120.6 or so), I will cover these short calls. I have multiple layers of short puts.

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

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