Friday, August 08, 2014

Weekly: Everyone Says Correction

Long time readers know that I sometimes like to read the public mood through conversations. In the past, these anecdotes have been decent timing tools. Recently, I had three separate conversations with folks talking of a 10% stock market correction. I'm not sure what to do with that, especially because that what I was thinking before hearing these anecdotes. Hmmm. What happens when everyone is looking for a correction? The polar opposite to a 10% correction might be a 10% up move to new highs.

I use two brokers, ThinkorSwim and Schwab. Schwab sends out emails with links to reports with a lot of information. One recent Schwab report was about Fed rate hikes and market reactions. Going on that report, corrections before a Fed rate hike tend to be limited to 6%. Measuring from the highs at 199 that takes SPY to 187 (currently 193). After the rate hike, there tends to be a relatively long time, often a couple of years, before a bear market begins. In a separate article, someone tracking the 4-year presidential cycle calls for a bottom on September 10, 2014. As always, past history doesn't guarantee anything. That said, looking at what happend before often produces better results for me, than seat-of-the-pants or emotion based trading.

In other markets, the German stock market is down over 10% from its recent highs. Bonds continue to be confusing. Eventually, most U.S. traders believe that interest rates are going much higher. However, rates in most of the EU and in Japan are much lower than U.S. rates, even though no one thinks that Spain or Italy is more credit worthy than the U.S. With global markets connected, these rates do matter, even though most small investors don't do anything with foreign bonds. Gold finally shows some strength, though the modest rally it is a far cry from the glory days of the gold bull market.

As for my trading week, I was up a bit for the week with a few more gains than losses. I closed out several trades for losses: T, WFC, TWX, and several other positions went against me. Here are my trades for the week:

Fri Sell MRK Sep 60 calls @56.1. I hedge my short Merck puts by selling calls.

Thu Cover TWX Aug 72.5 puts @72.6. I close out my Time Warner short puts for a 500% loss (basis the premium collected). I am still short TWX Aug 80 calls. TWX keeps falling a day after Fox pulls their takeover bid. My mental stop was 72.0 and TWX went below that before rebounding a bit. Ouch. A bit later I close out the short calls for the slimmest of profits: cover TWX Aug 80 calls @72.3

Sell BRKB Sep 120 puts @128.8. I rebalance my complicated position on Berkshire Hathaway adding to the long side.

Wed Cover T puts and calls @34.6: Buy to cover Sep 35 puts / Sep 37 calls
Big loss on the short strangle in the 400% range vs. initial premium. The rally on news gives way to the reality that a tax-inversion seems unlikely and ATT falters back below the base. Ouch. The calls I close at a breakeven profit but the put side is a big loser after the sharp decline in T.

Cover WFC Aug 50 puts @50.1. I close out my short puts on Wells Fargo for a 20% loss. I do not like the tape action. The open was below the strike price of 50.

Sell TWX Aug 80 calls @74.4. I hedge my short 72.5 puts in Time Warner by selling some calls. TWX down hard as Fox pulls its takeover offer off the table.

Tue Sell MSFT Sep 47 calls @43.2. Hedge short puts in Microsoft by selling calls.

Sell SPY Sep 200 calls @192.9. Add to short position in S&P 500 etf by selling calls. I see SPX 2000 as a likely to be a short term ceiling to any rallies and a good place to get short, if and when the market makes a new high.

Sell SLB Sep 95 puts @107.8. Add to longs in Schlumberger by opening a September position. A few minutes later SLB and the stock market extends to new lows. Sell SLB Sep 120 calls to hedge the just sold puts .18 @107.1. It is a turbulent market.

Sell VRSN Sep 60 calls @54.3. Hedge short puts in VeriSign by selling calls.

Sell BRKB Sep 135 calls @127.4. Hedge short puts in Berkshire Hathaway by selling calls.

Mon Sell VRX Aug 100 puts @116.5. New long position in Valeant Pharma. VRX earnings on 7/31 were a bit disappointing, but the stock is holding in its range for that day.

Sell BRKB Aug 125 puts @129.4. Add to longs in Berkshire Hathaway. Earnings were good. These puts are below the gap up on the news.

Most of the calls I sold short last Friday, could be sold for higher prices today.

Position summary:

net neutral ASH BRKB
net short SPY

closed T TWX WFC

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