Saturday, May 16, 2015

Are we there yet? 42-12 Grade B-

I count forty two winners, twelve losers for the May option cycle. Overall I was a bit too cautious on the stock market, closing some trades too early, not aggressive enough on the long side. The caution felt justified at the time, but cost me some profits with the stock market at record highs.

On summer car trips, kids sometimes ask "are we there yet?" No, we are not at a stock market top yet. As difficult as the market has been for many bulls, stock market bears continue to be the most frustrated group. Bond market bears got a biscuit this month, but the main course isn't on the plate yet either. Gold may be forming a bottom, but there are a lot of cross currents. 

As always, my market opinions tend to be about as good as flipping coins, so don't invest based on my opinions. In general, I find that market predictions are mostly for entertainment. I make money by managing risk (position sizing, limiting losses), not from predictions.

Some are looking the divergence of the transports (IYT vs SPY) vs. the broad market. Yes, this is a warning sign and means any advance is suspect, if that continues. Yes, valuations (Schiller PE10) are stretched. Yes, dividend yields are low. So caution is advised, but full bore bearishness is not warranted. Not until the yield curve inverts, not until price action confirms a down trend.

The 78% May win percentage (.78 = 42 / (42+12)) is in line with expected probabilities. Grade is B-, which I see as average. Again, for new readers, I tend to sell out of the money options with a 80% to 90% probability of profit, using the strike price as a stop. In the real world, this translates into about 80% winners. Profits tend to be small and steady. The losers can sometimes be large and sometimes can come in clumps if the market makes a big move. I took two big losses in HAR this month, my first real clunkers of 2015. GPRO CAT were some other small losers. Some closed winners include AMBA JWN KMX PANW STJ.

I keep watching bonds and gold but the option premiums and bid/ask spreads in GLD TLT GDX are not appealing at this time. Bonds (TLT) may be in the process of forming a head and shoulders top. Stocks continue to be valued at the high side. When the low interest rates are factored in, the valuations don't look as bad. 

I attend the local IBD CANSLIM meetup. The CANSLIM style focuses on high growth stocks with positive price momentum. Many of these IBD stocks are popping then flopping. There have also been some land mines (like HAR) with gap downs.

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