Saturday, April 18, 2015

Sell in May? 57 - 3 - 1 for April, grade A-

Another month of solid gains. I count of 57 winners, 3 losers, 1 unchanged, for the April option cycle, grade A-. Stock market consolidation can be good for option premium sellers. Some ways I have been evolving is doing a few more weekly options, and trading some big name stocks. I still do mostly traditional third week of expiration, but occasionally find something in the weeklies. In the past, I haven't had good experiences trading some of the big name option stocks such as Apple or Tesla. 
Again, for new readers, don't get too excited by the high win percentage. 80% to 90% is expected for my style of trading. The option buyer is hoping for a big 10x payoff, with only a 10% chance of profit.

The big question on many minds is whether sell in May and go away will work or not this year. Back in May 2014, I wrote "Tea Leaves for a Market Top." I keep going back to that. Some pieces of the puzzle are now present. The transports (IYT) are diverging from the overall market (SPY or VTI). The local stock market meetups are full of people. The Santa Monica meetup has to turn people away. Newbies are coming into the market. The main piece that is missing is the inverted yield curve. Quantitative easing in Europe and expansionary monetary policy in much of Asia remain big engines driving the global markets. 
The U.S. Fed is getting ready to tighten. There have been many articles about how the stock market keeps going up after the first Fed rate hike. The cliche I learned is two steps and a stumble, meaning the market goes down after the second rate hike. With so many people playing this game, it might be a good idea to leave the party early. No need to stay for the very last dance. However, the market's last bull phase can be rewarding as speculative behavior can be excessive. Some might say it is already that way, but only in hindsight will we know for sure.

I'm almost always cautious, but even more caution might be a good idea. For the most part, stock market bears have been frustrated. There are a few isolated stocks that have had decent down moves, but pickings have been slim and difficult. In the last days of a bull, the action can be choppy, so timing the tops is an extremely difficult game.

For now the bull market is still in force. The last piece of the bear market case, perhaps the most important piece, is an inverted yield curve and that tends to happen with Fed rate hikes. Some may wait for stock market technicals to confirm the down move by breaking below some long term moving averages. If it is a shallow correction, instead of a bear market, those moving averages can be good times to buy. Again, we won't know if it is correction or bear market until the dust settles.

No comments: