Weekly: Patience

It is a quiet week for me. I wait for better opportunities, and the calendar to get to June. Gold moves lower, stocks higher, bonds continue their amazing run. I make modest profits. I was a bit too cautious, but I see that as better than being too aggressive and getting clipped. I take a new position in the German stock etf EWG. 

There is some chatter about some big players buying VIX calls for September and October, expecting a big uptick in volatility (a sharp decline in the stock market). That tends to be a turbulent time, and is also the time when the taper is scheduled to end. So far, a good many have misplayed, or misread the market reactions to the Fed moves, especially in the bond market. Here are my three trades for the week:

Thu Sell IWM Jun 105 puts @113.3. Another mechanical rebalancing trade to get me closer to net neutral on the Russell 2000 etf.

Tue Sell GLD Jun 128 calls @121.9. Gold breaks to the downside after election news from Ukraine. I rebalance my short strangles by selling some calls. Again, the premiums collected are tiny vs. the margin requirements.

Sell EWG Oct 30 puts @32.1. New position in German stock etf. Stocks all across Europe are breaking out from a base formation. EWG options have tighter spreads and lower margin requirements. These puts are further out in time and closer in the money than I often do.

Position Summary:

long AMGN ASH BEAV CNX DAL DDS DIS EWG HON JWN SLB VRX

net long APC GLD

net neutral AAPL SPY

net short IWM

Weekly: dog days

Trade slows, spreads widen as many leave early for the holiday. I was on the right side of the stock market (bullish), but I often wish I was more aggressive with the market moving higher and volatility moving lower like the tide on the beach. 

A few posts ago, I wrote about a possible market top (link). The transports IYT made a new high today. The local Investors Business Daily CANSLIM meetup only had about a dozen people. If this was a bubble market, there might have been 100 people at the live meeting to talk stocks. So no top yet. Many will want technical confirmation, with a break of the 200 day moving average.

In observance of Memorial Day, here is a Youtube link to Trace Adkins performing Arlington (link2). Highlights for this week include new positions in Nordstroms JWN and Dillards DDS. 

Here is the recap:

Thu Sell IWM Jul 94 puts @110.8. I rebalance my short strangles on the Russell 2000 etf. I call these mechanical trades, because I am targeting a certain delta.

Sell DIS Jul 72.5 puts @82.5. I open a July position in Disney. DIS is one of my better trading stocks for 2014, so I want to stay with it.

Sell VRX Jul 95 puts @131.4. Similar deal for Valeant Pharma. I open a July position in one of my winner stocks for the year.

Wed Sell KORS Jun 75 puts @93.0. Michael Kors has earnings out next week on the 28th. I open a position way out of the money. Two other high end retailers, Nordstroms and Tiffany, reported strong earnings.

Tue Sell JWN Jun 62.5 puts @67.1. Nordstroms had a good earnings report last Friday and is pulling back a bit. Chart support around the 62.5 strike.

Sell GLD July strangles @124.8:

Sell GLD Jul 113 puts / Sell GLD Jul 137 calls

Again, selling strangles is a bet on a trading range. I am already short June strangles. Option premiums are tiny vs. the capital needed for these trades, but I have a lot of buying power and not that many good ideas at the moment.

Mon A lot of capital is freed up with option expiration, and I put some to work.

Sell IWM July strangles @110.0

Sell IWM Jul 91 puts / Sell IWM Jul 120 calls. These are way out of the money, so premiums are tiny, probabilities of profit in the 93% range. I already am short layers of June strangles on the Russell 2000 etf.

Sell EPI Jul 19 puts @22.1. Rally keeps going in India's stock market, EPI is an India stock etf. I add to longs with a July position. Again, it is extended, the base for the breakout is 19.

Sell AZN Jun 60 puts @71.8. Astra-Zeneca rejects Pfizers take over bid, stock moves sharply lower. Call premiums remain elevated, so some believe another company may make a bid or something else might go on. The 60 level is two support levels lower. Stock is holding up well intra-day.

Sell DDS Jun 95 puts @109.1. Dillard broke out on earnings on Friday. Chart base is 97.5.

Position Summary:

long AMGN ASH BEAV CNX DAL DDS DIS HON JWN SLB VRX

net long AAPL APC GLD IWM SPY

37-3 for April, grade B-

Thirty seven winners, three losers for the April option cycle. As always before new readers get too excited by the high win percentage, those are the approximate odds going into the trades. I mostly sell options for small premiums, with the risk of a big loss if there is a big move against me. People buying options with only a 10% chance of profit are hoping for a 10-to-1 payout.
 
I was a bit too cautious overall, though the two sharp down days, make it easier it justify. The surprise is that bonds are the best performing asset class, even as the Fed continues to taper.

The talk this week was about hedge fund trader David Tepper, Appaloosa Management (link), makes cautious comments on the stock market that many observers believe caused the big sell off. 

Old timers may remember other such situations when a big name person caused similarly sharp sell offs. If it is just talk, the market usually comes back. If there is underlying news, that is a different case. For now the Tepper comments look like just talk. His comment "don't be so freaking long," certainly apply to the over aggressive bulls. I recently wrote about the story of The Fly, a popular momentum stock blogger, who experienced a crash and burn due to his over exposure (link2).

Going forward, I remain cautiously bullish. None of the four signs of an imminent stock market top are present (link3).

Position Summary:

long BEAV CNX DAL HON KORS SLB VRX

net long AAPL AMGN APC ASH DIS GLD IWM SPY

Weekly: SPY fake out

The upside breakout in SPY turned into a fakeout. A breakout on Monday turned sour and most major indices were down for the the week. Bears got two big days for their side of the ledger. Bulls got gored by the trap. On Monday and Tuesday, I was chiding myself for not being aggressive enough on the long side with the record highs. By Thursday and two down days, it was the opposite, feeling like I was a bit too aggressive.

Highlights of my week include a new position in EPI, an India stock ETF, some SPY backratios and a few of what I call mechanical trades. Rebalancing trades to maintain a certain net delta. A monthly wrap up will be posted soon. There was also an interesting post just below this one about calling market tops, Tea Leaves for a Market Top, dated 5/13/2014.

As always the slogan for the blog is, real trades, no advice. Here are this week's trades:

Fri Sell VRX Jun 100 puts @123.1. I open a June position on Valeant Pharma. VRX earnings were so-so. The stock has been in the news over its role in a takeover attempt on Allergan AGN. I became interested in the stock by seeing it as a top holding in Sequoia fund. So far for 2014, VRX has been my most profitable stock so wanted to have a June position.

Thu Sell Jun SPY Backratio @187.2

Buy Jun SPY 176 puts / Sell 2x Jun SPY 173 puts

I net out to a tiny credit. This put back ratio is net bullish (delta positive), but has a chance of a explosive profit on a decline to the lower strike of 173. If stocks are up or unchanged, I keep the tiny credit. If down, I do well if the decline stops at 173. Below SPY 170, losses pile up. I already sold a July put backratio, and that is in the red.

Wed Sell IWM Jun 118 calls @109.8. The ping-pong ball market goes back the other way. I rebalance my short strangles on the Russell 2000 by selling calls. The premium is extremely tiny for selling these calls.

Tue Sell APC Jun 92.5 puts @101.5. I rebalance my short strangle position in Anardarko Petroleum to net long. It is a mechanical trade.

Sell IWM Jun 99 puts @111.9. Same deal with the Russell 2000 etf, I rebalance to net long, because I want to maintain a bullish bias and don't want to cover any short calls.

Sell EPI Jun 19 puts @20.7. EPI is an India stock ETF. There was a breakout on possible election news two days ago. 19 is the base of the break out. I placed an order yesterday, but did not get a fill. I am chasing a bit, but this is a tiny position on a low priced underlying.

Sell SPY put backratio for July @190.0:

Buy Jul SPY 174 puts / Sell 2x Jul SPY 171 puts for a small credit.

This backratio is net bullish (delta positive) with an explosive profit on a decline to the lower strike. It gives modest insurance against a measured decline to the lower strike of 171. In the case of a crash, it becomes a big loser.

Mon A monster rally day with new all time highs for SPY. I regret being so cautious for the May option cycle. The bright side it, at least I wasn't bearish or totally sitting out the dance.

Sell BEAV Jun 90 puts @99.0. I open a June position, long in BE Aerospace. Company says it is looking for strategic alternatives so it is in play. Chart support is at the strike price of 90.

Sell BRKB Jun 120 puts @127.0. Add to longs, Berkshire Hathaway is not participating in today's monster stock market rally. Considering how diversified it is, that is an anomaly.

Position Summary:

long BEAV CNX DAL HON KORS SLB VRX

net long AAPL AMGN APC ASH DIS GLD IWM SPY

expired: ba gild hog hpq kors msft ual

Tea leaves for a market top?

Calling stock market top is a popular game. As I noted in an earlier post, valuations aren't that good a timing mechanism. So what can a person look for? One thing is for a top in the transports, IYT is a transport etf. The old cliche is "two steps and a stumble," meaning two Fed rate hikes means the end of a bull run. A more modern Fed rule is to look for an inverted yield curve, when short term interest rates exceed long term. This can be on Treasuries or other rates. Right now, short term rates are near zero, so this isn't close. The transports continue to make record highs, so that is not close.

What else? Sentiment. I mentioned the AAII (Association of Individual Investors) weekly Wednesday survey. Again, it is in the mid-range, so it is not flashing a warning sign for a top. Then there is the popular media. A roaring bull on the cover of Barrons or similar publications, or super bull articles as the lead on MarketWatch tend to be a big negatives. I haven't see a bull recently. Then there are the anecdotal indicators. 

In 2013, I came into the year bearish on the stock market, but two separate conversations turned me bullish. Both were with smart, savvy, long time investors, both were ultra cautious on the stock market. One guy wanted to go to all cash, something he had never done in 50 years of investing! That was a huge green light. I would have been a fool to go "all in" based on an anecdote, but it certainly was a factor in me moving away from a bearish stance during a 30% up year.

The caveat is that any and all indicators can fail. A meteor strike or similar out of the blue news event can render all the tea leaves meaningless. In summary, look for the transports to top out first, an inverted yield curve, high bullish readings on sentiment, anecdotal stories of exuberance in the crowd.

/edited to add this section below: technical confirmation is often the final piece of the puzzle for a top. A break below various moving averages confirms the move. The two that I use the most are the 50 day and 200 day simple moving averages. There are a lot more technical indicators, but I don't swim that deep into the charts. 

Some may say that it is late to get out when the 200 day moving average is broken. A person can't always have their cake and eat it. Waiting for confirmation means missing part of the move, and the possibility of whipsaws.

Again in summary:
* watch for a top in the tranports first. IYT may top several weeks or months ahead of SPY.

* watch for an inverted yield curve (short term rates higher than long term rates) 

* watch for excessively bullish sentiment on AAII and in the popular media and websites. Also keep tabs on in person chatter and conversation.

* price movement confirms the top by breaking various moving averages.

Weekly: tepid record high

Another record high for the Dow Jones Industrial average. The mood remains tepid, meh, bored, skittish. The Russell 2000 is down 2% for the week, down 10% from its highs. Some popular trading stocks such as TSLA, TWTR took hits. I was long AAPL and it faded. On the other side HUM, EA, moved higher. Some are citing divergence between the Russell and the larger caps as a sign that the market ripe for a big down move.

Right now, I am not seeing it that way. The sentiment at AAII (link) remains in the middle of the range (28% bulls, 43% neutral, 29% bears on 5/7/14), and these are mostly life long stock investors. There is a large percentage of the population that doesn't trust the stock market and will not invest their money. If anything, the SPY chart is setting up for a possible upside breakout, keeping in mind the cliche, "never short a dull market." My highlights include new positions in BEAV (BE Aerospace) and SLB (Schlumberger).

Fri Sell SLB Jun 90 puts @100.0. I open a new position in Schlumberger

Sell APC Jun 110 calls @99.8. I rebalance my Anadarko position by selling calls. APC had a nice up move on earnings, but fizzled in the days after.

Sell ASH Jun 90 puts @103.5. I open a June position in Ashland. Ashland came up on a fundamental screen. The earnings were good. It is a bit extended to the upside.

Wed Sell AMGN Jun 95 puts @111.1. I open a June position in Amgen. Earnings were poor, but this has been one of my best trading stocks for calendar 2014, so I'll keep riding until price action breaks down.

Tue Sell APC Jun 90 puts @103.5. Anadarko moves higher on earnings and an upgrade. I rebalance short May strangles by selling June puts.

Sell DIS Jun 72.5 puts .30 @81.3. Disney earnings after the close. I open a June position at the 90% probability strike (90% chance of profit, 10% chance of loss).

Mon Sell GLD Jun 114 puts @126.4. I rebalance my short strangle in gold to neutral as gold nudges higher. 114 is at the lows of the year. Premium is tiny considering the large margin requirement.

Sell BEAV May 90 puts .35 @99.0. BE Aerospace gapping higher on news that it is exploring strategic alternatives (selling the company). Nice chart base at my strike price of 90. BEAV also came up on a fundamental screens that I sometimes do. One negative is that the options are thinly traded and the spreads are often frighteningly wide.

Position summary

long BA BEAV CNX DAL HOG HON HPQ KORS MSFT SLB VRX

net long AAPL AMGN APC ASH DIS GLD IWM

net neutral SPY

net short GILD UAL

Weekly: cautious trade

A cautious week for me. I feel like I've been over trading, and May can be a difficult month. I close out some losers as the market continues to chop around. I initiate new positions in AAPL CNX DAL MRK. All are low risk, low reward (aka worms). There are two story time posts just below this, one about The Biggest Losers, the second about the blogger The Fly.

Fri Buy to close KORS May 100 calls @94.3. I close these calls out at a break even loss. I got clipped on both sides of the short strangle on Michael Kors. Grrr. Double Grrr as KORS fades back lower later in the day.

Sell MRK Jun 50 puts @58.1. I open a June position in Merck.

Sell IWM strangles @112.1

Sell IWM Jun 95 puts

Sell IWM Jun 121 calls

I add another layer of short strangles on the Russell 2000 etf. Again, this is a bet on a trading range.

Thu I add longs for Apple, Honeywell, Wells Fargo, and Delta Air.

Sell AAPL put verticals (bullish position) @592.4:

Buy AAPL Jun 525 puts / Sell Jun 515 puts

Huge stock buy back, and 530 is the pre-earnings price, and that is chart support.

Sell HON Jun 82.5 puts @92.4

Sell WFC Jun 46 puts @49.5

Sel DAL Jun 30 puts @37.1

Sell CNX Jun 39 puts @45.0

Mon Buy to cover KORS May 82.5 puts @86.3. Ouch, that hurt. I cover these short puts on Michael Kors at a big loss as the stock knifes lower. I am still short May 80, May 77.5 puts, and May 100 calls.

Buy to cover UAL May 38 puts @38.4. Another big ouch, as United Continental continues to move lower and I cover short puts.

Grr, both stocks rebound a bit by the close. I continue to have a difficult time navigating this choppy market.

Position summary:

long BA CNX DAL HOG HON HPQ KORS MSFT VRX

net long AAPL AMGN APC ASH DIS GLD IWM

net neutral SPY

net short GILD UAL