Gold's 7-sigma move

Zero Hedge says gold had a 7-sigma move, or seven standard deviations. The math seems a bit off, but here is a blurb about 3-sigmas
>> In statistics, the 68–95–99.7 rule — or three-sigma rule, or empirical rule — states that for a normal distribution, nearly all values lie within 3 standard deviations of the mean.

About 68.27% of the values lie within 1 standard deviation of the mean. Similarly, about 95.45% of the values lie within 2 standard deviations of the mean. Nearly all (99.73%) of the values lie within 3 standard deviations of the mean.
>>

and another about 6-sigmas.
>>
Management uses Six Sigma as a technique to maximize the quality of its product. The goal is to achieve the least number of defects per unit of production. A Six Sigma process produces product 99.99966 percent of the time without errors or defects. This translates to 3.4 defects per million units produced.

>>

A painful day for me to be sure, but it would have been much more painful had I sold some puts on gold like I thought about doing. Sometimes the tea leaves don't work out, even with an article in the NY Times and a high profile table pounding from Goldman, sometimes these indicators fail.

Many of us have gold to protect us from 7-sigma moves in the financial markets. As I sometimes write, it is the big four historic events that we insure against: Major war, revolution, famine, plague. These are the events that can topple governments, cause their currency to go to zero. In the absence of these events, it just doesn't happen to major powers. Minor powers are another thing.

Some cite the fall of Rome but that was ten generations from peak to fall, and there were a fair number of major plagues and famines during that period.

These big moves are big reasons why I favor being diversified, and am almost always cautious with reserves. I started trading in the summer of 1987 three months before the crash, so in the back of my mind, I know that these 50 year storms can happen. Gold has shown itself not to be immune. This storm started in gold, and the margin calls in that market helped weaken the stock market.

I am not a fan of fast markets. There is no need to rush in because V-shaped bottoms tend to be rare, and by definition only a very few can buy at the bottom on the V. Many more suffer financial harm, thinking there will be a V, when it is a waterfall decline. So I prefer to wait for the dust to settle, perhaps take a small or partial position with the plan to add more.

Cover TLSA short calls

Cover TSLA May 50 calls @45.0

Burned again! Like I said, the so-called defensive action I took, selling calls, has burned me on Boeing and now Telsa Motors. LEN isn't looking so good either. These things happen. I hate covering at a huge percentage loss, but I hate risking a bigger loss even more.

Adding to the gold sentiment is a New York Times article about how gold is losing its luster. Certainly after 12 up years and a move from $300 to $1900, gold is due for some down time. That said, I don't think this is the final top. Timing the moves is tricky. For those long term investors that are light on gold, this is a good time to add.

Long BA BRKB IWM LGF PG WFC TSLA

Net long KORS SPY

Net short APC LEN

Rebalance APC, thoughts on GLD

Sell APC May 75 puts @87.0

I nudge my complex position in Andarko Petroleum closer to neutral.

Elsewhere gold was downgraded by Goldman Sachs. Unfortunately the GLD put option premiums are small, when factoring in the substantial margin requirements and the possibility of a big move. Buying calls might be the percentage play, but buying calls isn't something I like to do.

 

Long BA BRKB IWM LGF PG WFC

Net long KORS SPY

Net short APC LEN TSLA

Cover short BA calls

Cover short BA (buy back short calls) @88.4

This is a late report, I cover one leg of my short strangle on Boeing for a big percentage loss. BA and the rest of the stock market continue to move higher. By the close, BA backs off its highs, so this specific move was ill-timed. The reason I did it was so the overall April Boeing positions close the books for the month at about net neutral. The quick snap back is a hazard of using stops. The hazard of not using stops is a powerful move that results in a huge loss.

Most of the defensive action I took last week has turned out to be ill-timed. The zombie bull market as I call it, continues to lurch forward, sweeping away the bears, or the hedgers. My short strangles on APC, LEN and TSLA are now delta negative, meaning net short.

Long BA BRKB IWM LGF PG WFC

Net long KORS SPY

Net short APC LEN TSLA

Defensive action on APC BA LEN TSLA SPY

Sell APC via selling Apr 90 calls @83.5
Sell BA via selling May 92.5 calls @84.9
Sell LEN via selling May 43 calls @38.5

Sell TSLA via selling May 50 calls @40.8

Sell SPY backratios May 148/145 puts @155.7

buy May 148 puts, sell 2x May 145 puts

I got a bit too aggressive with my longs and am paying for it today. I take defensive action in Lennar Homes, Tesla Motors and the S&P 500 ETF. The backratio is delta positive (a bullish bet) with a large profit if SPY closes around 145 at May expiration. A decline below 142 causes losses. 

I stepped in the doo-doo with LEN and TSLA, and doing damage control by selling calls rather than closing the positions. The risk is a whipsaw because a steep rally can cause big losses on the short call portion of the short strangle.

This squall may be a passing shower, or it may be the start of something bigger. I move closer to delta neutral, but still have a bullish bias. Sharp, short corrections are what is to be expected during bull moves. However, calendar 2013 has been so placid, the uptrend so gentle, that it feels like a shock to have a sharp down day.

 

Long BA BRKB IWM LGF PG WFC

Net long APC LEN KORS SPY TSLA

Buy TSLA Rebalance APC

Sell APC May 95 calls @86.5

I rebalance my position in Anadarko Petroleum. With a modest decline, my delta has increased. I am offsetting that by selling some calls. My position is short strangles (short both puts and calls) net long. So I am betting on a trading range, hopefully with an upward bias.

Later in the day, I sell some puts on TSLA Telsa Motors

Sell May 30 puts @44.0, the stock is up on news of better than expected sales and a break even quarter. Telsa is heavily shorted. The chart is supportive, though the range is wide. 33 is the bottom of the breakout channel. The spreads on the options can be wide, so I don't want to have to roll or close the position.

Long BA BRKB IWM LEN LGF PG SPY TSLA WFC

Net long APC KORS

First quarter perspective

For the first quarter some of the ETFs:
+12.0% Russell 2000 IWM
+10.0% S&P 500 SPY
- 2.8%   20-year US Treasury TLT -2.8
- 3.6%   Emerging Markets EEM
- 4.7%   Gold GLD
- 6.6%   Silver SLV

Three more quarters of the same would mean +40% to +50% for the stock market, so odds are against that. Same for silver, three more quarters like this one and it is down 30% for the year, unlikely. (None of the above factors in the modest dividends.)

That said, I am not with the crows cawing about an imminent stock market correction, or the true believers saying this is a great time to be buying precious metals. The stock market advance is almost sure to reach more new highs. Metals haven't shown any real signs of a bottom, especially on headline sentiment and chatter.

As almost always, when the stock market goes straight up, my accounts tend to lag. I was on the right side of the market, mostly long, but because I hedge, because I trade long and short, because I sometimes trade bonds, or metals, I tend to lag behind. It goes with the territory. I had a good quarter, but not as good as the top ETFs (or as poor as the bottom of the list).

I recently had breakfast with a young relative and I talked about this tendency to be cautious. I prefer that my account go up slow and steady, with a high percentage of winners. I have little stomach for losers. Some trading styles are taught with 1/3 winners, 2/3 losers, but the winners are big home runs so the overall picture is profitable. I don't have a personality that can stomach so many losers. I am also a relatively slow moving trader, so vehicles such as the triple leveraged ETFs are not for me. Weekly options are not either. I'm not a big fan of the new 10 options either.

"Stick to my knitting," do what I am relatively good at. If I see something really good, maybe take a shot here or there, but it has been a long time since I have done that even. Certainly on big movers such as LGF Lions Gate Entertainment which is up about 50% since December 2012 (and 400% from 2011 when it was 6), more aggressive strategies would have reaped huge rewards. 

I am always learning. One reason I go to the Canslim meetings is to try and adapt parts of that home run swinging strategy to my relatively cautious trading style.

I hope all my readers had a good quarter, and continue on to have a good rest of the year. Cheers.

Buy BA PG (sell puts)

Buy PG via selling May 70 puts @77.1

Proctor and Gamble looks to be basing again, the previous base at 70 is support.

Buy BA via selling May 75 puts @85.8

Boeing popped higher on news of a successful test flight for the 787. It has a massive three-year-long base at 70 to 75. 

Both trades are low risk, low reward, high probability trades. One consideration is that the sell in May calendar effect may start to kick in by the May expiration.

Long BA BRKB IWM LEN LGF PG SPY WFC

Net long APC KORS

Buy APC LGF LEN WFC (sell puts)

Buy LGF (sell puts)

Buy LGF via selling May 21 puts @23.8

Lions Gate Entertainment continues its epic run up. I am reluctant to chase it, but am willing to take this low risk low reward position.

Buy LEN via selling May 36 puts @41.6

Lennar Homes had a good earnings report and then gave back its gain on that report. Support at 36.

Buy WFC via selling May 34 puts @37.2

Wells Fargo Bank has one of the cleanest balance sheets of major U.S. based banks. However it got hit with the other banks over Cyprus. Chart support at 34/35.

These are the best longs I could find. I still think it is too early to play the short side. There was blaring headline on the Marketwatch site predicting SP&500 1400, which would be 10% lower. It is always easy to sell fear. However, market tops are much more likely when the headline features a bull and a prediction of another easy 10% or more upside, rather than a sharp correction.

Later in the day, I sell some APC May 77.5 puts @88.9 to rebalance my complicated position in Anardarko Petroleum back to net long.

Long BA BRKB IWM LEN LGF PG SPY WFC

Net long APC KORS

Buy NKE SPY APC (sell puts, strangles)

Buy NKE via selling Apr 55 puts @59.7

Nike higher on earnings. Chart pattern is a text book breakout from a cup-and-handle base formation. Support is at the base at 55. If it drifts down to the base, the plan is to roll out or perhaps even double the position.

Buy SPY via selling Apr 145 puts @155.3

I add to my tiny long position in the S&P 500 ETF. SPY has about an 8% chance of being below 145 at April expiration. Yes, there is the Monday Cyrus decision, but waiting until after that may mean smaller premiums. So I add a bit today, and may add more if it the market moves lower.

Buy APC via selling strangles: 

May 75 puts, May 100 calls @86.9

A short strangle is a bet on a trading range. These strikes add to my net long position. My interest in Anadarko Petroleum is mostly because it is the biggest component of the oil fracking etf. There is chart resistance right here at 87/88 and support at 77 and 75.

Why all this activity today? I am flush with cash from 14 positions expiring last week. With Monday and possible Cyprus news, even though there is a rally today, premiums may go down after the news comes out. There is always the risk of some explosive news, and I still have plenty of dry powder after opening four positions.

Long BA BRKB IWM LGF PG SPY

Net long APC KORS

Rebalance APC (sell puts)

Sell Apr APC 77.5 puts @86.9

I rebalance my Anadarko Petroleum position back to net long. APC is up on news of oil from a well in the Gulf of Mexico. Oops, even before I can type all of this APC has dipped to 86.2, so a poor entry.

The news dominating the stock market is from Cyprus. There is also possible Fed news today. April is a long period option month, because the third Friday comes a bit later in the month. There are quite a few companies that will report earnings before April expiration. All of these factors mean there is no hurry to sell premium. I am watching and waiting. The other shoe might be some bank runs on rumors in other Euro countries.

Cyprus is too small to mean anything, but if one of the bigger countries destabilizes it can be trouble. Confidence is a fragile thing. The drum beat of fear is strong. It almost seems like that is what is desired to scare people as much as possible. Don't give in to fear. Act rationally, look at possibilities and probabilities, Don't invest on the 1% or less chance. I prefer to play the 80% or 90% chance and get the small rewards.

Long BA BRKB IWM LGF PG SPY

Net long APC KORS

14-0 for March, grade A-

Fourteen winners, zero losers for the March option cycle. When the stock market goes straight up, I will tend to underperform. I am glad for the many small profits. BA and LGF had strong run ups. My short strangles (selling the calls and the puts) all worked out.

So why the A- and not A or A+? Because I lagged the indexes, and because there were opportunities for some home runs in Boeing and Lions Gate that I did not take advantage of. I have been trading LGF for a full year now, was still reluctant to play this rally even in a small way. The secure thought is that if I can keep grading out at A-, it is going to be a fine year.

I am getting slightly better at profiting during extended bull moves. I am letting go of the idea of getting in at the low tick and am happy if I am in on a decent day or within a day or two. 

Long BA BRKB IWM LGF PG SPY

Net neutral APC KORS

Sell KORS strangles

Sell KORS strangles Apr 50 puts, Apr 67.5 calls @58.0

A short strangle is a bet that a stock stays in a trading range. For Michael Kors there is chart support at 55 and lower, and resistance at the price of the recent secondary offering 61, and the recent high at 65.

The zombie bull takes the Dow to its 10th straight record high. It is a nervous ride as the zombie is not to be trusted. A correction is sure to happen, but timing the in and out is not easy. Higher highs are a virtual certainty when there is this kind of sustained strength and that remains the percentage play. The coffee shop comments from two different people with bearish views on the stock market, mentioned in earlier posts, also point to higher highs. I don't know anyone that is a giddy, caution-to-the-wind bull. The kind that are everywhere when major market tops occur.

April gets us to a the seasonally strong six months for bonds. Option premiums continue to be low almost across the board, so pickings are relatively slim for option sellers.

There was an article on Yahoo about gold crashing to $1000. That is constructive for gold bulls, but not worth hanging a hat on without more indicators to back it. I haven't seen any gold permabulls that have thrown in the towel, or that have sold most of their gold to buy stocks and chase performance.

Long BA BRKB IWM LGF PG SPY

Net neutral APC KORS

expiring longs MON QCOM

Joyless bulls and adds for BA SPY (sell puts)

I add to my long position by selling BA Apr 72.5 puts @81.7

Boeing breaking out to new highs from a year-long chart base. There are multiple chart support levels. The calendar indicates a good chance for a sharp and quick stock market pullback in late March. Boeing is the kind of stock I would like to get more of on such a pullback.

I also add SPY longs via selling SPY Apr 140 puts @154.9. The gap at 142 to 144, I see as strong chart support.

I had coffee with some friends and one of them talked about a stock market bubble with no fundamentals to back it. Yesterday, I talked to another friend. He has been invested in various individual stocks all his adult life. This second friend talked about selling all his stocks, moving to cash and staying there. These kind of stories are not signs of a market top. A short pullback is in the seasonal cards, but it will likely be met by buyers. There was a talking head from a discount brokerage on TV, saying that customer accounts are still heavy in cash. 

Separately, there are reports of investors buying stuff like SPLV, a low volatility index ETF that declines less when the market goes down. While all these anecdotes are not data, they do influence my decision making.

Long BA BRKB IWM LGF MON PG QCOM SPY

Net neutral APC KORS

Gold cup half full or half empty?

With the Dow making a new all time record high a couple of notes on gold. On ZeroHedge they show a graph of gold vs. the Dow from the last high in 2007 (link1). It would be even more dramatic going to the older high in 2000, when gold was in the $400 range. Basically during these 13 years, those buying SPY at the highs have nothing but the modest dividends, and gold investors are up 300% ($400 to $1600 in round numbers).

The gold half empty case is mentioned on some stock market shows, that during the past 14 months gold is flat. For calendar 2013, gold is down. From the lows of 2008/2009 gold is up, but has underperformed the broad stock market from its lows. So gold vs. the S&P 500 can show what a person wants it to show, depending on the time frame chosen.

The hindsight trader can claim to have bought the lows, got out at each high, for each asset. Of course most reporting that they did this are liars, and I wouldn't believe them unless they had a real time audited account and no dummy accounts (like playing multiple March madness sheets picking so many possible winners, that one sheet is almost sure to have the winner). No one is that smooth that smart to be in the best asset every year, and get in at the lows and out at the highs, at least no one I have ever met.

The more important questions are what next. I already posted an idea for the stock market of early 2014 being a high, using the cycle time between the two previous tops instead of price. Time is just as important as price for option traders. For gold, I would like GDX, the gold miner ETF to make higher highs to confirm a turn in GLD. For now, any rallies in GLD are suspect. 

The big fundamentals for GLD are the Asian economies, because they drive 70%+ of the demand for physical. Some will argue about currencies, but the bottom line demand for physical is what ultimately is the long term driver. Some will point to record gold buying by central banks. I see this more as a negative in the long term. The bottom in gold was when the Bank of England clumsily sold their gold holdings at below $300 per ounce. Now that central banks are buying, it is more likely indicative of a longer term top than a bottom.

Some like to say the Fed is pumping up the stock market. However, the Fed pump is likely helping bonds, stocks, and gold. If Treasuries were yielding 5% or 7%, the opportunity cost of owning gold goes up dramatically.

On this trading blog, I have mostly avoided gold for the past year. With my bullish bias towards gold, it has been the right call. There have been better opportunities else where. That isn't to say that gold has no place in a long term investment portfolio, but trading and investing are different hats. For trading, I much prefer tailwinds and a high probability of profits, and that hasn't been happening in gold.

To recap, rallies in gold are suspect until the gold miner index GDX can start trending up. The back of envelope stock market top is scheduled for early 2014. Readers know that I view predictions as entertainment, so keep that in mind when reading my missives. The money is made with correct position sizing and risk management, predictions are less important.

Sell APC strangles and the zombie bull

Sell APC strangles Apr 75 puts, Apr 95 calls @82.5

I rebalance my position in Anadarko Petroleum to about neutral. I have a complicated position with several layers of short puts and calls.

The stock market continues what I like to call a zombie bull advance. Seems like virtually nothing can stop the market from lurching forward. At some point it comes back, but when? As I often write, calling tops and bottoms is more for entertainment than for real life traders.

Long BA BRKB IWM LGF MON PG QCOM SPY

Net neutral APC KORS

Buy IWM (sell puts)

Buy IWM via selling Apr 80 puts @90.8

IWM is the Russell 2000 ETF. I open a fifth position for April. Again, it is low risk, low reward. March and April can be tricky months, so I am even a bit more cautious than my usual careful self. Chart support that beginning of the year gap up at 84. More than a few stocks will report earnings before April expiration, so I am reluctant to sell puts this early.

Long BA BRKB IWM LGF MON PG QCOM SPY

Net long APC KORS

Buy BA, PG (sell puts)

Buy PG via selling Apr 67.5 puts @76.8

I was already short Mar 70 puts. This is my third position for April, which I see as a low number. Chart support at the 50 day moving average at 72, and at the base of 70. Proctor and Gamble is sometimes labeled as a defensive stock. However, its options are trading at 25% implied volatility vs. about 19% for SPY. 

 

Buy BA via selling Apr 67.5 puts @76.9. I still like Boeing, am already short Mar 70 puts. Chart support at 70, one strike lower gives me a margin for error. These two moves give me four open positions for April, 14 open for March. March is another short time month for options because the month starts on a Friday.

Long BA BRKB IWM LGF MON PG QCOM SPY

Net long APC KORS

Rebalance APC (sell calls)

I rebalance my complicated position on Anadarko Petroleum by selling Mar 87.5 calls @78.7. I was already short Mar 90 calls, Mar 75 puts, Mar 67.5 puts x2. As APC moved toward the 75 strike price, my positive delta (bullish bets) increased. The recent highs at 85 are chart resistance.

The markets are too fast for my tastes. I am not in front of a screen all day, and I tend to plod along, more like a turtle. Yes, there are opportunities for the nimble, but I am not in that group of the more nimble traders that can take advantage of these day-to-day moves.

My most recent moves last Friday were akin to slipping on a banana peel. Oops and ouch. A lot of ideas cross my mind. ThinkorSwim (my broker) seems sluggish this week. The volatile markets might be a factor. 

 

Long BA BRKB IWM LGF MON PG QCOM SPY

Net long APC KORS

Spano: Fear of Missing Out

Kirk Spano at Marketwatch (link) has an article about the fear of missing out. Some symptoms are checking your account much more frequently, considering much more volatile stocks or instruments. After a 150% rally off the stock market lows in March 2009 (in round numbers SPY 67 to 150), and a strong start to 2013, more and more folks are infected.

That said, some other talking head on TV pointed out that virtually no one at the coffee shop is bragging about their stock market profits or talking about their high flying winners. So it hasn't reached epic proportions that might signal a major top.

Again, I find that anecdotal stories can be powerful sentiment indicators. At the March 2009 lows, someone told me they were selling all their stocks, the exact week of the lows. At the height of the Internet bubble one of the little old ladies at church bragged to me about opening up a brokerage account for the first time in her life. During the run up in silver when it went from $14 to $49, several novices seemed to think they could not lose by being long silver.

Of course, it is easy in hindsight to see these turning points. It is not so easy in real time. It is sometimes difficult to distinguish a smart player from the classic dumb money, and rarely do they signal the exact market turn. At market tops there are a relative maximum number of buyers, at market bottoms the opposite, a relative maximum number of sellers. Nothing can change that, it is how markets work.

There are thing an investor can do to guard against the disaster moves. Avoid the all in, all out mentality. I tried very hard to tell the person that wanted to sell at the 2009 lows to scale out, to sell 20% now and then maybe another 20% in a few months. But they were too scared to consider anything other than their fear. At market tops, the opposite, there are a hundred reasons (usually all fundamentals) about why whatever they are buying will continue to go up.

Scaling in, scaling out is a reasonable strategy. I came into 2013 way underinvested in my trading account. I scaled in, day by day adding one position at a time. This way, if the market did turn, I had a variety of prices.

Another thing is to look at the chart. Runaway markets often form a parabolic blow off top. Markets don't always peak like that, but when a chart looks like a rocket taking off, ala silver running to $49, the risk for longs (and shorts for that matter) is high.

A person can learn by listening, by watching. Not the talking heads on TV which is 80% noise, but ordinary people that have always invested in something or always avoided something. When those folks move and want to talk about it, it might be useful information.

Buy BRKB LGF SPY (sell puts) hedge KORS

Buy BRKB via selling Apr 90 puts @100.7

Berkshire Hathaway has a chart base at 90, which is also where it broke out at the start of the year.

Buy SPY via selling Mar 142 puts @151.4

SPY is the S&P 500 ETF, the first ETF, and still the biggest. There is a gap at 142 to 145, again from the start of calendar 2013. I believe 145 will be support, and 142 gives me an extra margin of safety.

Buy LGF via selling Apr 19 puts @20.6

I also add to my longs in Lions Gate Entertainment by selling Apr 19 puts. Chart continues to look constructive to me, with a shelf of support at 19.2.

Sell KORS via selling Mar 65 calls @59.3
Michael Kors priced a secondary offering at 61.5 and that put pressure on the stock. The principle is also selling some of his shares. The recent high was 65.1. I am already short KORS Mar 55 puts.

All three put sales are low risk, low reward trades. The call sale, a hedge. I am putting some money to work from the 11 positions that expired last week. I am a bit skittish about the stock market because February and March have often seen quick and fast drops. 

Elsewhere, bonds and gold charts have broken down. The weak seasonality for bonds extends to April. Gold doesn't look good, but I am reluctant to trade it from the short side. $1500 on physical gold may provide round number support. Volatility has perked up a little bit.

Long BA BRKB IWM LGF MON PG QCOM SPY

Net long APC KORS

10-1 for February, A- grade

Ten winners, one loser for the February option cycle, I Ten winners, one loser for the February option cycle. I give myself an A- for the month.
 

A bit of luck, and a bit of skill, yield a lot of small winners. The one loser was part of a vertical spread on AMZN, so really there were no losers. Even the worst entry of selling puts on Boeing (BA) before the 787 grounding news worked out, with me making money on both sides of the short strangle (selling puts and calls). I didn't take many risks, so the winners were all small fish. I was a bit lucky especially on AMZN.

The tight and narrow advance looks like big money scaling in. It won't last forever, but while it does last, shorts, especially option buying shorts are being punished. Eventually, the trend breaks, the elephants stall or turn and run. Worst case is that the elephants stampede, and then the stock market bulls get their turn at being punished.

 

Long BA IWM LGF KORS MON PG QCOM

Net long APC

Buy LGF (sell puts)

Buy LGF Lions Gate via selling Mar 19 puts @20.0

I was already short Mar 14 puts. I interpret the short term action as constructive. There is a shelf of short term support at 19.2. I mentioned the Lions Gate earnings report in Tuesday's post. 

I believe the best is yet to come for LGF. For years, this company had losses, so no matter how strong the franchises were, most money managers would not, could not buy. Two quarters of earnings, with upside surprises, may bring in more institutional support. Yes, LGF has had a good run, so there is risk in going long at this time. A SeekingAlpha write up said to wait for a pullback to 19, so there are some small fish likely waiting to get in at that price.

Long BA IWM LGF KORS MON PG QCOM

Net long APC

Expiring this Friday AMZN EBAY GPS LEN TBT

Buy KORS (sell puts) and LGF earnings

Buy KORS via selling March 55 puts @62.6

Luxury goods maker Michael Kors gaps up on earnings. Chart support at 57 and 55.

Elsewhere LGF Lions Gate Entertainment has good earnings. LGF ran up into the report and is drifting lower for the day. The breakout base is at 16, so there is some air in the stock at the 19 range. I am looking at the options, but nothing is compelling. Going out to June means waiting through another earnings report. I may wait until next week when April options become available.

Long BA IWM LGF KORS MON PG QCOM

Net long APC

Expiring this Friday AMZN EBAY GPS LEN TBT

Buy APC BA MON (sell puts)

I sell puts on three stocks: Anadarko Petroleum, Boeing, Monsanto. I already had positions in all three.

Buy BA via selling Mar 70 puts @76.5

Boeing moving up today. The 787 grounding news could not move the stock below 73. I was already short BA Feb strangles, 67.5 puts and Feb 80 calls. There are multiple chart support levels, 70 looks like solid support.

Buy APC via selling Mar 75 puts @82.4

I rebalance my APC Anadarko Petroleum position to bullish. APC moving up after earnings. I was already short strangles, Mar 90 calls, Mar 67.5 puts and Feb 70 puts.

Buy MON via selling Mar 92.5 puts @101.9

I sell Mar 92.5 puts on Monsanto. I was already short Feb 90 puts. Chart support at the 50-day moving average and the gap up, both around 95/96.

Long EBAY GPS IWM LEN LGF MON PG QCOM TBT

Net long AMZN APC BA

Ground hog sees another year of bull, top in 2014

The subject line is an attempt at humor as I type this up on Ground Hog day 2013. During a recent ThinkorSwim webinar (Swim Lessons Thursday January 31, 2012) they spent a lot of time on the long term SPY chart. Here is a link to a similar Yahoo chart.

A lot of traders are focused on the potential of a triple top, and the price for SPY 157 or so. What caught my eye is the time frame. If the next market top is the same distance in time as the others, that gives another year of bull market with a possible top in early 2014. That fits in with the shifting sands of stock market sentiment.

While there are a few headlines trumpeting Dow 14000 and the best January since 1989, there were also articles featuring doom-and-gloomers such as Marc Faber calling for a 20% smash, and another less famous pundit calling for a 50% waterfall decline. These tend not to be the kind of articles featured at long time market tops.

So many seem to be focused on the price level of the two prior peaks, I don't think it will matter that much. Not many seem to be focused on the cycle length.

During the ThinkorSwim weekly market wrap up, one presenter lamented that low volatility grinds higher was one of the worst kinds of markets for his style of trading. It is increasingly difficult for option premium sellers to find good risk/reward situations.

Buy QCOM (sell puts)

Buy QCOM via selling Mar 60 puts @66.7

Qualcomm up on earnings. Chart support at 65, 62.

As for the broader stock market, I am looking at February 4th or 5th as a time to look for at least a pause to refresh from this January rally. Marketwatch has a headline best January since 1989. The individual investor is starting to stir again, after missing the entire huge 100%+ rally off the stock market lows. 

Long EBAY GPS IWM LEN LGF MON PG QCOM TBT

Net long AMZN APC BA

Buy AMZN (sell vertical put spread)

Buy AMZN via selling a vertical put spread

buy Feb 210 puts, sell Feb 220 puts @270.3

Amazon.com earnings will be out after the close. 

My thinking is that there have been a raft of big moves in other stocks, so these options are priced higher. Chart support at 260, 240 and 220. As I type this up, AMZN is slipping lower, so not the best entry. There is about an 8% chance that the 220 puts come into play by expiration. I tend to think volatility is pumped up because of earlier big movers on their earnings (GOOG, NFLX, AAPL and others).

Doing a vertical instead of a straight put sale helps with the margin requirement. Also protects against a crash scenario. On higher priced stocks selling puts before a crash can do permanent damage to an account.

Long EBAY GPS IWM LEN LGF MON PG TBT

Net long AMZN APC BA

Buy TBT (sell puts)

Buy TBT via selling Feb 63 puts @67.1

TBT is the double inverse treasury bond ETF. There is minor chart support at 63.5. If my puts come into play, the plan is to roll down and out. One negative to selling puts on TBT is the relatively large margin requirement, because it is a leveraged ETF.

Bonds have broken down. The seasonality for bonds remains negative (positive for TBT) until April. November to April tends to be the weaker six months of the year for bonds, and the other six months tend to be supportive for bonds.

Long EBAY GPS IWM LEN LGF MON PG TBT

Net long APC BA

Ferri: Mr. Market doesn't care what you think

Rick Ferri contributing to Forbes writes an article with the title: Mr. Market doesn't care what you think (link). There is a slight negative correlation, but not enough to be actionable. The exception is at extremes, however in the vast middle it is not enough to be a useful indicator.

Let me make some general comments about sentiment. I find it to be a useful indicator. I remember back at the height of the dot-com bubble and the day trading craze, one of the ladies at church, proudly announced that she had opened a brokerage account and was in the game. Looking back it is easy to see that as a huge blinking red light. 

More recently, when silver was making its run to $49, three different novices at three different places talked about silver and their expectations of easy money to be made on the bullish side.

It doesn't always work. As I often write nothing is 100%, and it tends to be the lucky and the liars that get out near the exact top. However, I find sentiment to be useful and powerful. When news comes out on a company, I like to look at the Yahoo finance message board for that company (link to LGF message board substitute the company's ticker for LGF) to see what others are thinking. I look to run contrary. If a stock forum is dominated by negative nellies, that is often a prelude to higher prices. The opposite is also true, if everyone is positive, it might be time to go the other way.

Headline articles or talking heads on financial TV can be good contrary indicators. In particular if a talking head says something like I am 100% sure, that is a strong signal to go the other way. No one with an audited track record is 100%.

Buy PG (sell puts)

Buy PG via selling Mar 70 puts @73.0

Proctor and Gamble up on earnings, breaking out from a beautiful base at 70. There is not much premium on this low volatility stock. Same is true for a lot of other stocks.

Elsewhere, I place an order to sell an IBM put spread to take a long position on IBM, but it drifts away from me and looks like no fill. 

Most traders have been focused on AAPL, NFLX, GOOG. For those fast moving high value stocks, it is often best for slow moving little fish traders like me to steer clear.

Long EBAY GPS IWM LEN LGF MON PG

Net neutral APC BA

Rebalance APC (sell puts)

Sell APC Feb 70 puts @78.5

I rebalance my short strangle on Anadarko Petroleum. The drift higher moved my short straddle to delta negative. Chart support at 74 and 70.

/edit to add: Later in the day, I sell another layer of APC Mar 67.5 puts. APC@79.4 

 

Long EBAY GPS IWM LEN LGF MON

Net long APC BA

4-0 for January grade B-

Four winners, zero losers for January. I give myself a B- grade for month. I came in under invested and gradually put money to work. Just as important as the trades I took were the ones I avoided. Both gold and bonds seemed too risky to be selling options on. I almost sold puts on AMGN and it kept sliding lower and would have been a big loser. The BA Boeing trade was right before the bad news, but again, that will happen. The Boeing news was not like an earnings report, in that it was a surprise. 

 

I also avoided AAPL. I see that super popular stock as being more appropriate for more nimble traders. As long time readers know, I am a relatively slow moving position trader. I like to have time work for me, though with the low volatility it is getting tougher to make money by selling options. Again, eventually, the market will correct and go down, but the blast off seen at the beginning of the year often can keep flying for a while before that fuel runs out.

Long EBAY GPS IWM LEN LGF MON

Net long APC BA

Buy EBAY and IWM (sell puts)

Buy IWM via selling Mar 77 puts @88.1

I add to my IWM Russell 2000 delta. There are multiple chart support levels, 82, 80, 78, 76. A move back to 78 would negate the entire rally off the November 2012 lows. A pullback seems inevitable, especially because February can be a down month. However, I don't expect a big drop.

I also buy EBAY via selling Feb 50 puts @54.3.

Ebay is up nicely on earnings. Decent chart support at 50. Neither is a perfect trade. I still feel underinvested with January expiration coming this Friday, so want to put more money to work.

Long EBAY GPS IWM LEN LGF MON UNP XRT

Net long APC BA

Sell BA calls

I lighten up on BA by selling Feb 80 calls @73.9

I was long Boeing by being short BA Feb 67.5 puts.I don't like the tape action and the news is getting worse. It seems unlikely that all the uncertainty will be lifted by February expiration.

Long GPS IWM LEN LGF MON UNP XRT

Net long APC BA

Buy LEN, Sell APC strangles

Sell APC strangles with a bullish tilt @77.2

Sell Mar 67.5 puts

Sell Mar 90 calls

A short strangle is a bet on a trading range for Anadarko Petroleum. There is chart support at 70 and resistance at 90. APC is the largest holding in FRAK, the oil fracking ETF.

I also buy LEN Lennar Homes via selling Feb 36 puts @40.7. Their earnings were solid, though the stock dipped during the conference call. Some folks like to think of selling puts as placing a GTC buy order at that strike and getting paid for it, if the stock never falls to that level.

Boeing has been all over the news and my position is in the red. News happens, and sometimes it is bad news.

Long BA GPS IWM LEN LGF MON UNP XRT

Net long APC

11 books for traders

Minyanville has a list that the firm First New York uses for its trainees (link). From that list I have read:
Reminisciences..., Market Wizards, the first Trader Vic book, the Murphy, Weinstein and McMillan books, so 6 out of 11.

It is not a bad list. The opening quip is one I tell everyone though not in the same words: "One thing that every beginning trader needs to learn is there are a lot of ways to skin the cat,“ says Tommy Goelz

There are a 1000 ways to make money (or lose) in the markets. What works for me, may not work for you, and vice-versa. Journaling (what this blog is), is a powerful tool to learn what works for you.

As for today's market, the low option premiums continue to be a challenge. I am tempted to take on more risk. The AAPL drop sure is tempting. However, I remind myself my worst trade of 2012 was a short Iron Condor on AAPL. I have found that yes, some stocks become associated with profits, some with losses. There are plenty of other stocks to trade.

Ritholtz post: cash really has been trash

One of the more popular posts on the sidebar has been "Cash is Trash." At the Ritholtz blog an interesting graphic about ten year asset class returns, that confirms this.

http://www.ritholtz.com/blog/2013/01/asset-class-returns-2003-2012/

Missing from the list are long term treasuries, straight gold, straight silver, all of which would be near the top of the list. So the list makers likely have a bias towards equity oriented investments. AGG is the bond entry and it has a shorter duration than TLT, and hasn't done as well.

Cash has returned zero since the 2008 financial crisis (0.1%), and may stay there for a while yet. Those with money market accounts have seen those statements perhaps with 0.01% as the stated rate. Zero returns are bad, though many might say, better zero than risking another -30% down year in the stock market, or a similar move in bonds (some European bonds already saw that during their crisis). However, the other side is that those that moved to cash during the crisis have missed out on a doubling in the U.S. stock market.

Obviously if someone or some group were smart and lucky enough to be in one of the top performing asset classes every year, their returns would be tremendous. Just as obviously, no one does that, well maybe 0.05% but there are far more liars saying they did (usually after the fact, in hindsight) than real life people that actually did and have the records to prove it.

I know a lot of traders dislike hearing it, especially novice traders, but steady state allocations such as PERM (25/25/25/25 gold, stocks, bonds, cash) or a 50/50 stock and bond allocation do okay in most markets and over the long term will out perform most professional money managers. Yes, every trader thinks they will be in the top group, the outperforming group. In reality, 80% of active managers lag the indexes over the long term. These are the smartest of the smart.

Buy MON (sell puts)

Buy MON via selling Feb 90 puts @99.3

Monsanto broke out from a flat base on strong earnings. There is chart support at 92 and 90. Again, I am going with a 90% percentage option for a tiny premium. The low VIX readings mean pickings are slim for put sells (and call sellers).

Long APC BA GPS IWM LGF MON UNP XRT

Buy IWM (sell puts)

Buy IWM via selling Feb 78 puts @86.6

I continue to edge into the stock market by selling 90% probability puts on the Russell 2000 ETF. There is a 90% chance that the puts will expire worthless if held until expiration. It seems difficult to imagine a scenario where the stock market gives up all its gains from the November 2012 lows. It could happen, but historically, less than a 10% chance.

This trade feels uncomfortable. Some recent trades moved against me quickly, so it feels like I have a cold hand. I remind myself that I came into the year, way under exposed to the stock market, so even if on the 10% that some of these puts come into play, getting assigned stock on a sharp pullback wouldn't be the worst thing.

Long APC BA GPS IWM LGF UNP XRT

Buy BA (sell puts)

Buy BA Boeing via selling Feb 67.5 puts @76.2

Boeing has been trading in a narrow range for about two years now. The recent market rally saw modest new highs. There is chart support at 75, 70. The strike is near the 2012 lows.

Long APC BA GPS IWM LGF UNP XRT

Buy UNP (sell puts)

Buy UNP via selling Jan 125 puts @130.2

I buy Union Pacific railroad, it broke out from a base at 125 and there is minor support at 127. Since breaking out, it made a higher low and now a higher high. If it does move down to the strike price, a roll down and out is the plan. Being under-invested is an uncomfortable feeling during this roaring bull week for the stock market.

Elsewhere, gold and bonds are moving lower, in part because the slowing and possible end of the Fed's massive quantitative easing program. I wistfully look at the up move in TBT (inverse bond ETF) and how little I participated. 

I continue to be tempted to take a shot at the short side of the stock market, but fighting the tape can be an expensive battle. I remind myself that often it is the third time that will break. The stock market has not even faced strike one. The tepid decline on Thursday, did not scare any bull, or excite any bears. 

I went into 2013 expect a down year for the stock market. So far I have been wrong.

Long APC, GPS, IWM, LGF, UNP, XRT

Buy GPS (sell puts)

Buy GPS via selling Feb 28 puts

Having for the most part missed the massive two day rally, I buy Gap Stores on the strength of a public pronouncement to short it (Yahoo link). There is minor chart support at 30, 29, 28.

Long APC, GPS, IWM, LGF, XRT

2012 year in review 101-27-3 grade B-

Overall modest gains, up 9.7% in my trading account. For closed trades, there were 101 winners, 27 losers, 3 breakeven trades for a 79% winning percentage. B- is my grade for the year. The letter grades are new for this year and I like the concept. 

While critics might say that 9% trails the gains in SPY, IWM and EEM, I trade more than stocks, and also go long and short. I'll take 9% year-in-year out, especially because I believe I am at a lower risk level than many other investors and traders.

Select ETFs:

SPY +13.5% TLT -0.1% GLD +6.6%

SLV +9.0% EEM +16.9% IWM 14.3%

Best trade of the year measured by the margin required, were short puts on EWG, the German stock ETF during the summer crisis time. Made 80% vs. my margin required. Other traders other brokers may have higher or lower margin requirements. Novices are going to tend to have higher requirements, advanced and pro traders often lower. Worst trade was short Iron Condors on AAPL Apple computer, lost like 500% basis the premium collected on the bad leg. Other 2012 winners were monthly rounds of selling puts on LGF Lions Gate, and BRKB Berkshire Hathaway, and some short strangles on IWM. Some other losers include GDX, ALXN, WFM, MMM. Other winners include GLD, XRT, AMZN, IBM.

The win percentage is about as expected. 79% winners would be extraordinary if I were doing straight coin-flip 50/50 up or down trades, but I often take trades at 80% probability or better.

Some notable events include: moving my retirement accounts to Schwab and attending a bunch of their free live presentations. Many are aimed at beginners, but I still managed to find some nugget in almost every presentation. I started going to some local stock market meetups. The local CANSLIM group is often interesting. It seems difficult to find stock market groups, so even though the momentum style favored by CANSLIM is not my strong suit, I find value in the occasional CANSLIM meeting. I don't advertise my blog at the meetup, nor do I talk much about my own picks, mostly I listen and try to learn something.

I continue to view online webinars presented by my other broker ThinkorSwim. In particular, their one-hour weekly market wrap up is something that I try to watch every week. Non-customers can register and view the wrap up for free. Some of the material is filler, some is same-old, same-old, especially for weekly viewers, but I almost always find something of value.

With classes, with presentations, with indicators, with methods and strategies, a few folks have unrealistic expectations, believing in some kind of holy grail. Nothing is 100%. Nothing. If something is 100%, it tends to stop working as soon as it gets found and published. The ThinkorSwim folks often remark, that they are looking at the pot odds (poker term), or that they have seen a lot of movies so have a good idea how this movie is going to end. That doesn't mean they don't get it wrong, but their experience gives them a better idea. Journaling is one way to avoid making the same mistakes over and over, and something I highly recommend.

During 2012 I ventured into some more exotic option trades. Naked strangles became routine, I did a single short Iron Condor (which turned into my biggest loser for the year). Delta neutral is another term and it means that a position makes money on time decay as long as the underlying remains in a range. Many pro traders use delta neutral strategies such as short Iron Condors and short straddles, and short strangles. For those that want to learn more about options, the CBOE link (Chicago Board of Options Exchange) is a good place to start learning.

I see that my first blog post from 2006 has sometimes been on the most popular list lately. Back then, I was mostly doing buy/writes and taking some small trading positions. I have learned so much by doing this blog and evolved so much during what is now close to seven years of blogging. Making my trades public makes me far less likely to do what some might characterize as “stupid trades.” I started in the stock market in August 1987, a few months before the 1987 stock market crash. That trial by fire has made me a relatively cautious trader. 

Again, let me restate, that I do this blog mostly for my own benefit. I also that hope that some others might learn from my trades and observations. Surprising as it may be to some, I have nothing to sell, nothing to advertise, nothing to gain from my blogging.
 

Buy XRT (sell puts)

Buy XRT via selling Jan 57 puts

XRT is the retail stock ETF. Chart support at 58. I wish I could say I bought the low of the day, but that virtually never happens, especially with orders placed before the open. 

I was surprised by the steep selloff. However, I am way underexposed due to my busy schedule. Hopefully, I will have more time to trade and blog.

Long APC, IWM, LFG, XRT

Buy APC (sell puts)

Buy APC via selling Jan 65 puts. Anadarko is the top holding in FRAK, an ETF play on oil fracking. I have played it before, and am coming back to it. 65 is chart support.

Long APC, IWM, LFG

7-0 for December grade A-

Seven winners, zero losers for the December option cycle. All were small winners including a short strangle on IWM and short puts on BRKB, EWZ, LGF, TBT.

My schedule limited the time I could spend on the stock market. Going forward I have two small positions, short Jan IWM puts, and Mar LGF puts. I'll write a year in review a bit later in the year, as New Year's Day approaches.

Long IWM, LGF

Buy LGF (sell puts)

Buy LGF Lions Gate via selling Mar 14 puts

For the first time in a long time I placed some good-til-cancelled orders to sell options. I placed them on Sunday, and LGF got filled today. I had second order to sell IWM Russell 2000 puts and a third to sell GLD puts. I cancelled the GLD order on the big drop morning.

Long BRKB, EWZ, LGF, TBT

Buy IWM (sell puts)

Buy IWM via selling Jan 70 puts

Placed an order before the open and got filled on the morning dip. By the end of the day, nicely in the green. I also entered a day order to sell TBT Jan 53 puts, but it expired without a fill. IWM is my first January position. With my busy schedule, I only have a few small December positions.

Long BRKB, EWZ, LGF, TBT

Net long IWM

2-0 for Nov grade B-, also buy EWZ (sell puts)

Two winners, zero losers for the November option cycle. I was on the sidelines for most of the month. The grade B- is on a curve because of difficult market conditions. The two winners were IWM Russell 2000 stock ETF and LGF Lions Gate Entertainment. I saw a lot of red ink on orders placed before the open on some of the big dipper down days. 

I also buy EWZ Brazil stock ETF via selling Dec 45 puts. More a gut trade than anything else. I finally get some green ink by the end of the day on one of these pre-market orders.

Long BRKB, EWZ, LGF, TBT

Net long IWM

Buy LGF (sell puts)

Buy LGF Lions Gate via selling Dec 14 puts

Another whoops order entered before the open. Red ink follows as the market crumbles.

Long BRKB, LGF, TBT

Net long IWM

Buy TBT (sell puts)

Buy TBT via selling Dec 53 puts. Another ouch entry with TBT taking a big hit today. TBT is the double inverse Treasury ETF. My order filled close to the open and moved deep in the red. Other positions also took on water, though LGF Lions Gate had a positive earnings surprise after the close.

The time change has mostly brought grief with my recent trades. These things happen. Hot streaks and cold streaks are part of life for almost all traders.

Long BRKB LGF TBT

Net long IWM

Rebalance IWM (sell puts) "brilliant"

I had the “brilliant” idea to rebalance my IWM position back to delta positive by selling puts. I placed an order to sell IWM Dec 72 puts before the open and got filled shortly after the market open. Ouch. 

The bad news is some red ink on my positions, the good news is my huge cash position. LGF also has been going down, so those positions are taking on water as well.

I'd like to say that the stock market reaction is over done, but the other side of the argument is that the market is always right, don't argue with it.

Long BRKB, LGF

Net long IWM

Buy LGF and BRKB (sell puts)

Buy LGF Lions Gate Entertainment via selling Nov 15 puts

Buy BRKB Berkshire Hathaway via selling Dec 77.5 puts

With the time change, I find some time to place some orders before the open. With virtually zero exposure in my trading account, I take some small positions. LGF hit an air pocket ahead of its earnings, but at below 15 I am a buyer. The story on Berkshire is the same as it has been for a while, a stock buyback at 10% above book value provides major support.

Long BRKB, LGF

Net long IWM

Dollar Cost Averaging vs. a Lump Sum

A Vanguard study (link1) is cited on Marketwatch (link2), saying that investing all at once gives better results over dollar cost averaging. The premise is a person inheriting a large sum of cash, or some other kind of windfall, such as selling a business, or winning a lottery. The edge for lump summing (investing all a once) tends to be measurable, though small.

It is worth thinking about. However, there are several caveats. The vast majority of stock market investors are not in that fortunate group making a decision about a large inheritance. Much more common are people making every day decisions with their every day savings. For example a person that has been in CDs for ten years and decides to plunge into the stock market, or bond market or gold market.

Those making "all in" or "all out" decisions tend to do poorly. While a few will do okay, many more will buy and sell at near the worst moments. This is how markets work, that at market tops there are a relative maximum number of buyers, at market bottoms a maximum number of sellers. A lot of those wrong-way buyers and sellers are small investors that feel the greed at the top and the fear at the bottom and act on it. NOTHING CAN CHANGE THAT. Markets make tops when a lot of people are buying, and bottom when a lot of people are selling. Those that think they can beat that, tend to be fooling themselves, or in an elite group with some special talent. Almost everyone making "all in" or "all out" decisions believes they are making a smart decision, but 80% to 90% are making terrible decisions.

So while the Vanguard study is interesting, it mostly applies to a person receiving a large sum out of the clear blue sky, not someone who is moving "all in" or "all out" because of news, or "just because." Another point is that dollar cost averaging can be a disastrous strategy during a prolonged bear market. Of course, no one thinks they are entering that territory when they start investing. Only in hindsight can we really say, that there was a 10 or 20 or 30 year long bear market in a certain asset class.

Another passive way to invest is to set an asset allocation and then rebalance as the various assets move up and down in value. This forces an investor to buy when prices are lower. The catch is that a person has to stick to their asset allocation. The permanent portfolio popularized by Harry Browne is one such approach (25% each to cash, bonds, stocks, gold). I am a fan of this approach. However, as always, there are no guarantees, but this kind of approach has done well for the past 30 years, with no need for bold decisions or market timing. Some will say that is because of the huge bull markets for gold and bonds and that is unlikely to be repeated. 

Another more common approach is a 50/50 stock and bond allocation, with a cash reserve of six months or a year that stays in cash. The big danger with this kind of approach are black swan events such as a change of government due to revolution or the loss of a major war, making all those paper assets virtually worthless. While the odds are low for any particular country in the short term, over the long term, these historic events do happen. Again, think back to 1900 and how many of the major powers (France, Germany, Russia, China, Japan and more) saw their governments fall and their bonds essentially go to zero before 1950. Equity investors did not do much better. Americans tend to ignore these kind of big risks because we have been blessed, but just like investment results, that is not guaranteed for the future.

My schedule continues to be too busy for much trading activity, and probably will be that way for the next two months. So I'll chime in when I can, but it won't be often.