Friday, August 01, 2014

Weekly: Stock market hits iceberg

The good ship stock market hit an iceberg on Thursday. Will the compartment doors hold and limit the damage? Or is it disaster time? I vote for more downside, a modest decline, that may get to about 10% over time. It is over 1000 days since the last 10% correction on the S&P500. 

Trading highlights include closing two long positions, (CMI, EWG), selling calls on many of my long positions, and buying a small slice of insurance (SPY vertical put spread). The chatter on TV and on the Internet is that too many are too comfortable buying this dip. I am looking for a bit more downside, but not a crash. I may look for more longs next week. 

There is a waterfall decline underway in high yield (aka junk bond funds). ETFs such as HYG, JNK, PHB look terrible. Bonds may also be forming a top. The next decline in stocks might also be paired with a decline in bonds. Too many are counting on a replay of the 2008/2009 market when the big stock market decline came with a big rally in bonds. 

This cycle might be that much more painful for asset allocaters that rebalance strictly between bonds and stocks. The place to hide, short term or cash basically pays nothing.

Here are the trades from this red-letter week:

Fri Over the course of the day, I sell calls on many of my longs: Amgen, Anadarko, Ashland, ATT, Disney, Fed Ex, Honeywell, the Russell 2000 etf, Stanley Tools, the Utility etf to lower my deltas. Some talking heads on TV are too happy about buying this dip. I am positioning for further weakness, a glide path down. Selling calls adds another layer of risk: a huge up day would now cause me about as much discomfort as another huge down day.

Sell DIS Sep 95 calls @85.6
Sell AMGN Sep 140 calls @127.3
Sell HON Sep 100 calls @92.3

Sell ASH Sep 110 calls @100.0. Ashland gaps lower after its earnings report.
Sell SWK Sep 95 calls @87.5
Sell FDX Sep 165 calls @147.3

Sell IWM Aug 115.5 calls @110.4
Sell APC Sep 135 calls @105.4
Sell XLU Sep 44 calls @41.5
Sell T Sep 37 calls @35.4

Thu Sell IWM Aug 117 calls @112.4. I rebalance my position in the Russell 2000 etf as the stock market moves lower. I am net long IWM.

Cover EWG Oct 30 puts @29.2. Ouch! I cover these short puts on the German stock etf at a 80% loss. Too much pain, too much exposure for my tastes. U.S. market is now careening lower, and my trading account is suffering its worst day of the year so far.

Buy SPY vertical put spread:
Buy SPY Oct 180 puts / Sell SPY Oct 171 puts @193.8
This put spread on the S&P 500 etf is a slice of insurance. It comes at a cost, but my deltas are increasing so rapidly, I feel like I need more cushion against a 10% or more decline that we are long over due for (over 1000 days without a 10% correction in the stock market).

Wed Sell AMGN Sep 115 puts @129.7. Add to longs for Amgen. AMGN moving higher on earnings. Chart gap is at 124.
Sell MSFT Sep 39 puts @43.4. Add to longs in Microsoft. MSFT down three days in a row.

Tue Seven trades, highlights include new longs positions in MRK, T, closing my position in CMI.

Sell IWM strangles:
Sell IWM Sep 95 puts / Sell IWM Sep 123 calls @113.6
I go even further out of the money than usual, to the single digit probability range on this short strangle on the Russell 2000 etf. Like a lot of traders, I expect volatility to tick up into the fall. I remain net long IWM, short puts and short calls.

Sell ASH Sep 90 puts @108.8. I add to longs in Ashland by opening a September position. ASH has been a steady stock for me in 2014.

Cover short CMI Aug 140 puts @146.6. I close this position for a break even gain (commissions equal profits on trade). Cummings Engine came out with an ok earnings report and moved lower yesterday. I'd rather not stick around for expiration because of the negative reaction to earnings.

Sell FDX Sep 130 puts @148.5. Add to longs in Federal Express by opening a September position on the dip. Competing firm UPS is down on earnings, hurting the group. FDX sometimes does not follow UPS, and FDX is into a three/four day decline.

Sell MRK Sep 55 puts @59.2. New long position in Merck. MRK higher on earnings.

Sell T Sep 35 puts @36.7. New long position in ATT, as it moves up on news, on huge volume. This is a technical chart play. There are likely a lot of sell orders at the current price, holding back the stock.

Mon Add to longs in Disney and Honeywell by opening September positions.

Sell DIS Sep 77.5 puts .30 @86.1.
Sell HON Sep 85 puts .21 @95.1.

Position summary:



net short SPY

exited CMI EWG (covered short puts)

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