Saturday, January 16, 2016

Monthly: Still in Kansas? 41-13-2 Grade D

I count 41 winners, 13 losers, 2 break even trades for the January option cycle. Unfortunately, for naked premium sellers, losses can be enormous and gains are capped at 100%. I took a lot of big whopper losses.

Are we in a bear market? In the movie, The Wizard of Oz, Dorothy says to Toto, "we are not in Kansas anymore," after being lifted away by a tornado. It certainly feels like a bear. The indexes are closer to -10%, but many (75%?) stocks have already declined more than 20% from their highs.

I am down close to 5% for the two weeks. SPY about -8%, IWM (Russell) about -11%, GLD (gold) up 2.6%, TLT (bonds) up 4.5%. So grading on the curve, I give myself a D. For the absolute result, the grade is F. If a person loses 5% of starting capital every two weeks, the account will before October. Starting with a big loss means that it might be a very long road back for a cautious premium seller. I might make 1% in a good month.

What is done is done. I will regroup. If this is still a bull market, and we are still in Kansas, bull market strategies will eventually start to work. Buying dips, selling puts, are things that work in bull markets. In a bear market those strategies are the road to the poor house. There were a couple of sharp rallies, so shorting willy-nilly can get a person in trouble as well.

Bonds are up pretty good, but some of that is flight to safety. The sharp stock market decline is deflationary. Walmart, Macys and some other retailers have reported poor results.

I do sometimes put on a fundamentalist hat and look at PE ratios, price-to-book, total market cap to GDP, Shiller PE10. The market isn't cheap by traditional measures, even after the 10% drop from the highs. In any case, there tends to be overshoot, where the market gets quite cheap, so scaling in, rather than going all in would be the strategy if we get to that bridge.

Anecdotally, the mood at recent in-person stock market meetings has been a bit too upbeat given the market action. One young relative recently asked about opening up a brokerage account. No one I know is talking about selling all their stocks. So there is a lot of room on the sentiment side before it feels like a bottom. In 2008/2009, virtually no one was opening brokerage accounts. Plenty of folks I knew either did sell everything or strongly considered it.

Calendar-wise, January is not usually time when the market goes straight down. So this year has been exceptional. Going forward, if I can only find the yellow brick road, a lion, a scare crow and a tin man :)

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