Saturday, September 20, 2014

50-6 for September, grade C+

The September cycle was my second most profitable month of the year, so why the low grade? I left a lot of money on the table during a strong up month for the stock market. Many of the calls I sold during the early August dip, became big losers. SPY is up over 5% from the August lows and my account lagged badly during the rally. Winners for this option cycle include APC ASH DIS FB FDX. Losers include GLD MSFT. For the year, AMGN IWM VRX have been among the best trading stocks for me. I skipped VRX this month and missed out on more gains.

My short term timing was not very good. The intermediate term was better, but like that the old Maxwell Smart might say, "I missed it by that much" (holding up his fingers an inch apart).

I again remind readers that seasonal patterns such as the 4-year Presidential cycle and the 10-year decennial pattern point to an upside acceleration starting September 30, 2014 and lasting about 18 months. Year 5 of the decade averages up 28%. Can 2015 live up to that? Stay tuned.

Gold is a recent Exhibit A, that seasonal patterns don't always work. I took a loss as gold kept dropping, even though September tends to be a bullish month for gold. However, it has been nearly a straight slow drop for GLD. Bonds may have topped on Ukraine news, but bull seasonality for bonds remain in effect until late October. Junk bonds and REITs have also been volatile, mostly lower.

I remain mostly bullish on stocks. Many of my biggest losers in 2014 and 2013 were selling calls as part of short strangles. There are bearish arguments that include: the Fed taper ends next month, bonds are topping, BABA the biggest IPO ever. On the bullish side are seasonal factors, the market trend. The Fed is shifting to neutral, but it usually takes several Fed rate hikes to summon the bear. We haven't even seen one Fed rate hike yet.

I'll keep watching out for signs of the bear. These include: inverted yield curve, divergence by transports, frothy sentiment stories, breaking the 50 day and then the 200 day moving averages to the downside. So far none of those signs of the bear are present. Transports continue to make new highs along with the broad indexes. Bond yields have ticked higher, but the yield curve still has short term rates well below long term rates. Virtually no one is publicly talking about the stock market, even with the market at record highs. I have yet to see a stock market bull on a magazine cover or Barrons cover. 

A correction of 5% to 10% can happen at any time, but a bear market usually requires several of the indicators listed to flash to sell. This remains the most hated bull market in recent history with stock ownership below 15% of households (about 48% own mutual funds and/or etfs).

Calendar seasonality turns bearish for bonds in November and lasts until April of the next year. If there is a modest bond market rally into October, it may be a good time to get short. TLT (20 year Treasuries) and TBT (inverse of TLT) are what I like to trade. The bad part is that both require substantial margin to sell options, and right now option premiums are small to tiny. For the most part, I've avoided trading bonds all year because of the tiny option premiums, large margin requirements and unclear trend, but the time for action may be soon.

Gold continues to decline, having given up most of 2014's gains. I may take another shot at the long side. The 52-week low around GLD 114 (2 or 3 points lower than today for GLD) might be a time to try it. Silver is now down for calendar 2014 after being up 15% in February, after a brutal -36% bear year for silver in 2013. REITs and high yield bonds have also been declining. Until about 2 or 3 weeks ago, bonds and REITs were the best performing major asset classes for calendar 2014. High yield bonds broke down first, then regular long term bonds, then REITs.

Readers know that my favorite trade lately is selling naked puts. Some readers might like the idea, but might be in an retirement account, or lack the account authorization level. HVPW (high volatility put writing?) is an etf that sells puts. HVPW sells puts 15% out of the money on 20 high volatility stocks, 60 days out. HVPW has a 0.95% expense ratio and is up about 1.2% for calendar 2014 (vs. about 9% for SPY). The attraction is the 9.3% in dividends paid out over the past 12 months. 

As always, this is a not a recommendation to buy or sell. The big caveat is that HVPW hasn't seen a trial by fire having a launch date of February 2013. That 9.3% yield could be lost in one bad month, or perhaps even in one day if there is another flash crash. As long time readers have seen, the percentage losses on naked options can be eye popping when a strong trending move occurs. Read more about HVPW, the put selling etf with a 9% yield, at Marketwatch (link).

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