End of 3rd quarter

Year to date returns for some ETFs:
+14.7% SPY S&P 500
+ 2.4% TLT 20-year US Treasury
+13.1% GLD gold
+24.3% SLV silver
+ 8.9% EEM Emerging Markets
+13.1% IWM Russell 2000

Plus signs all around, with the bigger plus signs in metals and U.S. stocks. Sell-stocks-in-May started as a good idea this year, as the stock market moved lower, but the rally has moved past the April highs. Silver was one of the laggards in 2011, and treasuries a strong performer in 2011. In 2012, the roles are reversed with Treasuries barely positive and volatile silver a strong performer.

Regression to the mean is a powerful tendency in markets. The other side of that is the huge money can be made in trending markets by aggressive traders. Range traders and trend traders tend to be opposite styles. It is difficult to master both kinds of dances. To do one well, is enough to make decent money, as long as position size and risk management are strong. The latter two are vital no matter what kind of style, no matter what kind of vehicle.

Many successful traders believe that risk management and right sizing of positions are far more important than the kind of indicators used, or if a person is a trend follower, or a range trader.

I wish I had some bold predictions or insight into the markets. Unfortunately, I've had little time to look at or think about the markets, or to reinvest the money that was freed up at September option expiration. For now, I am content with my smallish low risk positions.

14-5-1 for September grade B-

Fourteen winners, five losers, one breakeven for the September option cycle with a grade of B-. Another positive month, though the gains were modest. Short strangles were a dangerous strategy this month and I covered the short calls at major losses. To offset those losses, there were gains on layers of shorts puts.

As I wrote, earlier some call buyers made 5x to 10x their money this month. No home runs for me, and the hedging reduced returns. Still, another month in the green is a positive, and I covered the losers before they became nasty.

Going forward, all I have are short put positions. Changes in my schedule mean less time for the stock market. I'll still update, but there may be delays. Also October is often a dangerous month in the markets, so I often am more cautious this time of year. The historical record of September as the worst stock market month, so far has been opposite, with big gains this month. My favored strategies of selling puts or strangles suffers when premiums are low like they are now.

Long ALL BRKB EWG GLD IWM LGF XHB XRT
ALL Allstate Insurance
BRKB Berkshire Hathway B
EWG German stock ETF
GLD Gold ETF
IWM Russell 2000 ETF
LGF Lions Gate Entertainment
XHB Housing stock ETF
XRT Retail stock ETF

Other winners for September include short puts on AMGN Amgen, ESRX Express Scripts.

Buy IWM (sell puts)

Buy IWM via selling Oct 79 puts @86.7

The Russell 2000 ETF made a new 52-week high. Resistance often becomes support, so that is 85. There are multiple minor support levels at 84, 81, 80. The massive Fed induced rally in stocks and gold was a surprise to me. Fortunately, I covered all my short calls before the news event.

Captain Obvious can say in hindsight that it would have been best to be long calls. Some of the calls I sold are up 5x to 10x in value in a few weeks, so call buyers hit home runs. Thank goodness I covered before the losses became financial ice bergs. It is ironic that just days after Barrons runs a column about short strangles (short both puts and calls) producing excellent returns, the strategy blows up with major losses for those that did not use stops. Even stops are sometimes of limited value on a fast moving news day.

Long AMGN BRKB ESRX EWG LGF XHB

Long GLD IWM XRT

Net neutral SPY

Heart: Fantasy Football lessons for investors

Long time readers know that I like sports analogies. Ross Heart at Minyanville has 15 traits and lessons that will help you  in fantasy football as well as investments:
1. Research 

2. Quick Decision-Making

3. Sentimental Picks
4. Spotting Value
5. Riding Winners 

The full list is at the Minyanville link .

>>

I have been looking at the markets, but am not finding that much to be compelling. Some stocks of interest (besides the ones that I have positions in) include: BIIB KORS TRV

Sell KFT (cover short puts)

Cover short KFT Sep 39 puts @40.7

Kraft Foods gaps down on news. I bail out at a break even profit to avoid the uncertainty. Even though there is modest chart support at 40.

As of this writing, my short covering from yesterday looks like some good moves, especially with gold moving higher this morning.

Long AMGN BRKB ESRX EWG LGF XHB

Long GLD IWM XRT

Net neutral SPY

Short covering: GLD IWM XRT

Cover short XRT Sep 63 calls @63.2

Cover short IWM Sep 85 calls @83.9

Cover short GLD Oct 177 calls @165.2

It is a similar situation to yesterday, I was short strangles on all these, and when the stocks moved higher, the short call side becomes a loser. I did not expect today's massive rally. For all three: Gold, the Russell 2000 ETF and the Retail ETF, there is a high probability that layers of short puts will offset the losses from these calls.

There is some discussion on taking losses in yesterday's post. To repeat some it: basically, there is no one way that works best for every trader, every situation. Using a stop loss, whether it be a mental stop, or an actual order can help limit losses in a trending, orderly market. If a market gaps on news, stops will have less value and may not work. In trading range markets, stops often get triggered and then the stock reverses, to the consternation of many traders. 

Some traders won't use stops. A few favor a style that doubles their positions when they start losing. There are a lot of ways to go. Some traders will initiate their positions at well known, well publicized stop loss levels. It is often a game within the game, for every buyer, there is a seller, and each has their reasons for making a move. 

Again, in a trending bull market, hedging strategies such as selling strangles, will lag behind buy-and-hold in terms of performance.
 

Long AMGN BRKB ESRX EWG KFT LGF XHB

Long GLD IWM XRT

Net neutral SPY

Cover LGF short calls (and stop losses)

I cover my short LGF Sep 15 calls LGF@15.4

With Lions Gate in the money (over the strike price of 15) this leg of the short strangle is taking on water. I remain short multiple layers of short puts. I thought 15 would provide resistance. The loss is over 100% on this leg of the short strangle, which sounds alarming. However, it is a small dollar amount, and is offset by the probability of profits on the short puts.

/edit to add: LGF closes near unchanged, so at least for the moment it looks like a bad decision. Discussion on use of stops follows: When a position goes against a trader, that trader can choose to use stops or not. The overall market mood and direction are factors when I decide whether to close out a losing position. Some traders place actual stop orders, some use mental stops. 

Some traders will double down if a position goes against them. Obviously this only tends to work if initial position sizes are very small. There is no method that will always work. Stops can save a person from big losses during trending markets. However, in a trading range market, whipsaws are common, where a stop level is triggered and the price reverses. Stops may not work if there are big price gaps at the open or after a trading halt.

Long AMGN BRKB ESRX EWG KFT LGF XHB

Net neutral GLD SPY
Net short IWM XRT

Buy ALL, rebalance GLD & LGF (sell puts)

Sell LGF Oct 13 puts and Oct 14 puts @14.8

I rebalance back to long by selling two layers of puts after the rally in Lions Gate pushes my position to net short. I was short Sep strangles (15 calls, 14 puts). There is resistance at 15, but this rally looks like it has a shot at breaking that.

I also sell Oct 33 puts on Allstate Insurance with ALL @37.1. Allstate broke out from a chart base at 35 at the end of July on a strong earnings report. The base makes for layers of support at 35 and 34, so 33 seems like a relatively safe strike to sell puts.

The Fed news makes for a volatile day in gold, which is now up, after tumbling immediately on the event. This pushes my short strangle to net short.

/edit to add: later in day I sold GLD Oct 150 puts @163.4 to rebalance my gold position back to neutral. The bad part of the layers of short gold puts is that they eat up a lot of working capital in terms of buying power. The positive is that I still have some dry powder. My broker likes me today, with this being my fourth trade of the day, a recent record, if not an all time one.

Long AMGN BRKB ESRX EWG KFT XHB

Net long GLD LGF XRT

Rebalance XRT (sell puts)

Sell XRT Oct 54 puts @61.4

I rebalance my retail ETF position back to delta positive. I was already short Sep strangles 63 calls, 57 puts and more layers of puts below that. Like I wrote yesterday, retail has been one of the strongest groups during this rally (home builders, medical and tech are some others). Chart support for XRT at 56 which is the bottom of the trading range, resistance at 63 which was the rally high.

Long AMGN BRKB ESRX EWG KFT

Net long LGF XRT

Net neutral GLD SPY
Net short IWM

Buy XHB home builders (sell puts)

Buy XHB via selling Oct 21 puts @23.4. XHB is the home builders ETF. XHB broke out from a chart base at 21.8 and there is another layer of support at 21. Home builders have been one of the strongest sectors during this rally. Other strong sectors include retail, medical and tech (mostly Apple).

* I added a search box to the blog. It looks for blog content and links that I have posted. Blogger says I have over 1200 posts over the course of six years. So if nothing else it may be a useful search tool for me.

Long AMGN BRKB ESRX EWG KFT XHB

Net long LGF

Net neutral GLD SPY
Net short IWM XRT

Rebalance GLD (sell puts)

Sell GLD Sep 151 puts @162.3

I am surprised by the strength in gold. The short strangle I recently sold (Oct 147 puts/Oct 177 calls) is underwater and taking on more water as gold rallies sharply. To move back close to net neutral I sell some Sep 151 puts. I do so reluctantly, thinking that gold is most likely to fade. Another factor is the hefty margin requirement because the underlying is high priced. On the other side, these puts only have about an 8% chance to come into the money by September expiration, and I have plenty of dry powder from the recent option expiration.

Another recent reluctant move, selling LGF Sep 14 puts to rebalance isn't working out too well, as Lions Gate is taking on water with the rest of the market.

Long AMGN BRKB ESRX EWG KFT

Net long LGF

Net neutral GLD SPY
Net short IWM XRT

Sell GLD strangles and Buy BRKB (sell puts)

Buy BRKB via selling Oct 77.5 puts @85.6

Story remains the same on Berkshire, chart support and a stock buyback. I was already short Sep 77.5 puts.

I also sell strangles on gold this morning. I sell the Oct 147 puts, and Oct 177 calls for credit. Again, a short strangle is a bet on a trading range. GLD is breaking out this morning with GLD@159.0. However, there is resistance at higher prices.  Chart support is at 148 and resistance at 175. So while bullish, I am not wildly bullish. Like I wrote in an earlier post, gold has been getting some positive press with the Soros and Paulson buys.

This morning's stock market rally has nudged my IWM and XRT positions back to net short. LGF had a rough Monday, perhaps because of disappointing box office results for Expendables II, but is up today on strong DVD sales for Hunger Games. Anecdotally, some are reporting the DVD is sold out at some stores.

Long AMGN BRKB ESRX EWG KFT

Net long LGF

Net neutral SPY
Net short IWM XRT

Ritholtz: Where has the retail investor gone?

Barry Ritholtz lists ten reasons at the Washington Post (link1). To summarize:
1 Secular cycle (long term cycle)
2 Psychology (investors are scared)
3 Risk on/risk off (Fed intervention)
4 Poor returns (self explanatory)
5 De-leveraging (paying down debt instead)

Five more reasons are at the link and I see it as a decent summary of reasons. In a separate article, high school students were surveyed and 75% believe the stock market is rigged against them.

Over at the Ritholz blog (link2), he makes an argument against the thesis of the book Stocks for the Long Term (1994), that over the long term stocks always outperform bonds.

Let me add two cents and say that what many long, long term investors ignore are systemic risks where government bonds and stocks go to near zero. This happens when governments fall, because they lost a major war, revolution, or the country breaks into pieces. While extraordinary events, they do tend to happen. Read some world history and count up major powers in the 20th century that suffered such events (China, France, Germany, Italy, Japan, Russia).

Only the United Kingdom and the United States were relatively free from these scars in the 20th century, and even they suffered major problems from winning the wars. The odds are much greater than the miniscule percentages that most Americans like to give them. Probably because Americans have never seen it happen here. This is a good case for having some physical gold, just in case.

6-1 for August grade B

For the August option cycle, I count six winners, one loser, and give myself an overall grade of B. The lone loser was one side of a LGF short strangle. Had I waited it out, it would have come in okay, though the drawdown would have been scary. Winners included short puts and calls on LGF and IWM. Seven is fewer closed trades than usual and that is due to my vacation. I added a new Philosophy page that has my grades at the bottom (link) and can also be accessed by the tab on the header, next to the word "Home." I also added a First Time Readers page (link2).

Going forward, I am still looking for a stock market trading range. LGF Lions Gate has the movie Expendables II opening today. Gold looks to be a bit too popular in the short term, what with articles citing big buys by George Soros and others. Bonds are perplexing. I outlined my long term view of a parabolic up move followed by a crash, but this doesn't help that much with the short term.

Long AMGN BRKB ESRX EWG KFT

Net long LGF SPY

Net neutral IWM XRT

AMGN Amgen

BRKB Berkshire Hathaway

ESRX Express Scripts

EWG German stock ETF

IWM Russell 2000 ETF

KFT Kraft Foods

LGF Lions Gate Entertainment

SPY S&P 500 stock ETF

XRT retail stock ETF

* ETF = exchange traded fund

Rebalance XRT (sell puts)

Sell XRT Sep 57 puts @61.4

This move rebalances me to neutral on the Retail ETF. I was already short Sep 52 puts, Sep 54 puts, Sep 63 calls, and Aug 50 puts. I am surprised at the strength in the stock market. I am dancing closer to the flame with the narrowing of the short strangle (short 63 calls, short 57 puts and two more layers of short puts).

The bond market in the short term is confusing to me. I wrote about the possibility of parabolic move up in bonds on big news, followed by a crash. What does a trader or investor do with that? I am still processing, though my tendency is towards risk aversion.

Long AMGN BRKB ESRX EWG KFT

Net long LGF SPY

Net neutral IWM XRT

Sell IWM Sep 73 puts

Rebalance to neutral again as IWM keeps rallying. I was already short IWM Sep 67 puts, Sep 71 puts and Sep 85 calls, as well as an Aug strangle that looks to expire safe tomorrow. IWM is the Russell 2000 ETF.

Long AMGN BRKB ESRX EWG KFT

Net long LGF SPY

Net neutral IWM
Net short XRT

Rebalance LGF (sell puts)

Sell LGF Sep 14 puts @14.3 I rebalance to long on Lions Gate by selling these puts. I was already short Aug 13 puts, Aug 16 calls, Sep 13 puts, Sep 15 calls. The rally had moved my position to net short. A spike in volume sometimes marks an intermediate top for LGF. While volume was on the high side yesterday, it wasn't as big a volume spike as some previous tops.

I feel uneasy about selling these puts. The short strangle is narrow at 14/15 (short Sep 14 puts, short Sep 15 calls). We will see how it works out. Lions Gate has the movie The Expendables II out this weekend.

Elsewhere Berkshire discloses some buys and sells:
sales: ir kft intc ups pg kft ge v
buys: psx nov via bk dva dtv wfc ibm
Because BRK is such a big and public player, their moves are news.

All my August positions look to be safe for expiration this Friday. My IWM and XRT positions are back to near neutral. Again, this happens as the prices move without me buying or selling.
 /edit to add: sold another layer of puts later in the day, LGF Dec 11 puts with LGF@14.5

Long AMGN BRKB ESRX EWG KFT
Net long LGF SPY
Net neutral IWM XRT

Trade of the century--shorting the bond bubble

With no Olympics on TV, I feel like I have time to write. I had a recent conversation about bonds, and the words "trade of the century" came out. Eventually, being short U.S. bonds will be a huge winner (being long TBT is one way to be short bonds). The air already has come out in select European bond markets. For example, the Spanish ten-year bond went from 3% yield to 7% in about a year. I see the same eventually happening in the U.S.

Doing a search on "bond bubble 2012" turns up a lot of hits. A few interesting links:

brief thoughts from Peter Schiff link1

Jim Kochan quoted in Barrons link2

Allan Roth at CBS with alternatives link3

My thoughts are that the bears will eventually be right, but not quite yet. For investors and traders, technical analysis can be a useful tool. Stereotypical bubble markets have an exhaustion phase, that include a short sharp run up in prices before the bubble pops. This might be a 30% to 100% increase in a few months. Timing the exact top is near impossible, and a parabolic top, may or may not occur in bonds.

The Fed is a wildcard. QE1 and QE2 (quantitative easing) and the Twist have injected close to $3 Trillion USD into the bond market. Even in the gargantuan U.S. bond market, $3 trillion, makes a huge difference. The trickle down has spread to most other markets. Low interest rates affect option prices, CD yields, stock yields, real estate, gold.

When and if the U.S. bond bubble bursts there will likely be casualties in other markets. If the 10 year Treasury goes to 7% (which is about the average yield for the past 30 years), stock yields may well go to similar levels, carrying costs and opportunity costs for gold and real estate become that much higher, derivative decay for options and leveraged ETFs becomes that much steeper.

It seems like bond bears have been crying wolf for years now, and been wrong, wrong and wrong. Their time will come. One scenario is a war or economic crisis that is a catalyst for a parabolic rally before a crash. Again, in parabolic moves, trying to time the exact top tends to be a fools game.

For the short term, I remain positive on U.S. bonds until October. This seasonal bearish period is November until March. As always, seasonality is a weak indicator, and easily jumped (eg: if every "knows" that bonds turn in October, most will jump in September and start to ruin the indicator).

For the long term, I am looking for the parabolic phase. Because of the massive Fed intervention, we may or may not see a textbook bubble blow off top. If we don't, indicators such as the 200 day moving average on TLT might be useful tools.

Oldtimers remember the Internet bubble. Everyone and their brother knew that the stocks were over valued. However, many thought there was still time. Many traders that tried to short the high flying Internet stocks, lost money because as the irrational exuberance reached a fever pitch and the blow off top was much higher than most could imagine. Many bought the first steep drop in Internet stocks, thinking there was to be another rally, but got crushed. The U.S. bond market is many times bigger than the stock market, and if there is a bubble and a crash, the long term economic damage may be great.

For easier historical tracking:
TLT 125.49 SPY 140.77 BND 85.69 GLD 155.99 TBT 15.48

A footnote: I started a new blog for my piano playing, so the about me section now has that as the lead. I also took this time to revamp the layout and look.

Late: Sell LGF calls

Late report from Friday:
Sell LGF Sep 15 calls @13.5
I lighten up on my LGF position by selling the Sep 15 calls. I am already short Aug 13 puts, Aug 16 calls, Sep 13 puts. Three months ago, the earnings report led to a rally to 15. I think with the mixed earnings report just out, that would be the best case.

Longer term, I still think Lions Gate is worth $20 or more. However, the short term upside is limited and that's the reason for selling calls.

Long AMGN BRKB ESRX EWG KFT
Net long LGF SPY
Net short IWM XRT

Buy ESRX (sell puts)

Buy ESRX via selling Sep 52.5 puts @60.6
Express Scripts higher on earnings. Chart support at 55, but I am reluctant to sell the 55s, choosing the lower risk, lower reward of selling the 52.5s.

Elsewhere, movement and decay has pivoted my IWM and XRT positions to delta negative, or net short.

Long AMGN BRKB ESRX EWG KFT
Net long LGF SPY
Net short IWM XRT