Weekly: more ratios, another warning sign

This week I did a call ratio with SPY at 292.6 or so:
buy SPY Jul 292 calls
sell 3x SPY Jul 301 calls
for about a $150 per unit debit. Best case is a rally up to 300 by July expiration. Worst case is a runaway rally. A flat or down market means the debit is lost.

I attended the local CANSLIM meetup. One of the long time attendees announced his retirement from his fully tenured professorship, to do stock trading full time. Yikes. He looked like he was about 50 years old.

People giving up secure high paying jobs such as a full professor, for the complete uncertainty of the stock market is typically seen at market tops. So add yet another warning sign to the long list. (CAPE, GDP to market cap, inverted yield curve, transports leading the way lower, bad breadth, speculative IPO market).

Be careful out there.

Monthly: Record highs, Grade B+

I mostly match the gains in SPY this month, up a bit over 3%. Like SPY, my trading account reached new record highs.

Year to date returns (dividends not included for etfs):
QQQ +22.2% Nasdaq 100, mostly tech
SPY +l7.6% S&P 500 US large caps

IWM +15.0% Russell 2000 US small caps
EEM +9.5% Emerging market equities
GLD +8.8% Gold

TLT +8.2% US 20-year Treasury bonds
SLV -1.1% silver

My account up 25.2% for 2019. Yippee! Let the good times roll. Gold accelerated to the upside. Bonds have had a good year. Quantitative easing will tend to do this, inflate almost all asset classes.

The zombie bull continues forward. There are signs of a top, as I wrote in last week’s post. The inverted yield curve, CAPE and Buffett valuation indicators, speculative IPO market, more people wanting to go all in on leverage, a person that never did much with stocks wants in, after decades of ignoring the stock market.

TINA (there is no alternative) may be the strongest argument for the bulls. Sub 2% 10-year bond yields, most other major markets, Japan, Germany, China, have serious structural problems. There still are a large contingent of scaredy cats waiting for the US stock market to drop. Some have been waiting a while. Others cashed in after a strong first quarter in 2019.

I don’t have any great insight as to direction. I continue to be cautiously bullish, slightly delta positive on most underlyings. Biggest winners in 2019, continue to be AMZN and TSLA. Biggest loser is still BA. I continue to roll up, roll down as the market fluctuates, trying to stay near the target delta. This month, buying at the money calls was often the best way to rebalance after a big gap up. Call buying had mixed results, but overall a nicely positive month. Up more than 3% in a month is a good month.

I made small forays into BYND, CAT DE WMT, mostly for profit. I got burned by CRM. I covered many sold calls for losses during the Powell fueled rally, staying slightly delta positive on most underlyings. As cautious as I have been, it is a bit surprising that I am keeping up with the advance. As long as there are green plus signs, I’m not going to change much. Especially because I feel like I am being relatively cautious.

Weekly: The bear case is substantial

It was a frustrating week. The big rally early Monday, had me scrambling to cover sold calls for losses. Later in the week DIS moved higher after analyst comments. Overall, I eek out a small gain, a bit less than the gain in the indexes.

At the anecdote ranch, a friend asked me about the stock market. He is an older man, never did much in the stock market, has done relatively well in real estate. This is the kind of person that gets interested in the stock market at tops. Market tops form with a relative maximum number of buyers.

The bear case is substantial. The Buffett indicator, total market cap vs. GDP, the CAPE or Schiller PE10 both are at red line. The inverted yield curve, the failure of transports to make new highs, and semiconductors falling are all red flags. The large number of speculative IPOs, relatively poor market breadth are two more.

So what is on the bull side? The AAII sentiment indicator remains in neutral. Large numbers of newbie investors fear the bear. A few are asking about all in on leveraged long ETFs, but far more talk about selling everything and waiting for the inevitable bear market.

One of the stronger bull arguments is about alternatives. With bonds also at nose bleed valuations, cash paying only a little, gold remains far off its highs. 2% or 3% just doesn’t cut it, so people are forced to take on more risk.

Weekly: Fed relief rally

The Federal Reserve rides to the rescue, causing a booming relief rally after six down week. The overall markets were up about 4% this week. My account up a little over 3%. My brief foray into buying puts, mostly ended up with losses. That is often the case when hedging via buying puts and the market doesn’t go down. I closed some short calls for losses to stay mostly delta positive on most underlyings.

Tesla and many other stocks had booming rallies off their lows. Overall the market ran a little too hot for my taste. Still, a 3% gain is good, even if I lagged the major indexes on this up move. BYND Beyond Meat soared after its earnings report. I played it very small, selling some way out of the money puts. When the market heats up and moves up quickly, delta neutral strategies aren’t the best place to be.

Weekly: Buying puts for a ratio spread

I have been buying at the money puts on QQQ and SPY to hedge the out of the money puts. With the gaps at the open, I find this to be easier than selling more calls. With each choice there is a cost. Buying puts reduced the potential income from theta decay.

One positive is that if a decline accelerates, the negative delta from each long put increases. As almost always, it is half a loaf. The overall position is similar to a ratio spread. For a simple example, long one atm put, short 5x puts with 10 delta, for a net near neutral position. Ideal would be a minor decline to the strike of the 5x sold puts.

Markets fall again, now six weeks in a row. My losses are minor, less than 1%. I continue to aim for a slightly positive delta on most underlyings. New positions include CAT DE. One of the TV talking heads suggested buying puts. That’s often a pretty good signal to go long. Summer is almost here. The year seems to be going by very quickly.