Weekly: Bulls cross the Rubicon, 51% bulls at AAII

The bulls have crossed over the 50% Rubicon at the Association of Individual Investors (link) 51.9% bulls as of 8/27/2014. Going forward, the high percentage of bulls is a red flag for the stock market. That said, the continued rally has me scrambling. Readers might remember I sold tons of calls during the recent dip, and many of these short calls are deep in the red. The loser list include calls that I sold on AMGN MRK MSFT SPY. During this recent rally from the SPY 190 lows on August 7th, I have made money, but have significantly underperformed a buy-and-hold approach on the 5% up move.

A couple of weeks ago, I wrote about everyone expecting a correction and that a sharp rally might be what frustrates the most people. I did not expect so sharp, so immediate a rally and have paid for it. C'est la vie. Bonds also continue to rally even though the most recent QE program is scheduled to end in October. Thank goodness, I didn't go long TBT (short bonds).

I made a record number of trades during the calendar month of August. Some might say, over trading. We will see how it all comes out in the wash at expiration time. I am posting about a hour before the market close. Have a good three-day weekend. Cheers, to the end of summer. Here are this week's trades:

Fri Sell AMGN Sep 134 puts @138.7. Rebalance short strangles on Amgen by selling puts. As AMGN moves up my short Sep 140 calls are threatened. Even after this move I am net short, but less so.

Sell BRKB Sep 135 puts @137.1. I sell another layer of puts on Berkshire to rebalance, I also cover short BRKB Sep 115 puts .01 to free up a smidgen of buying power.

Tue Sell MRK Sep 58.5 puts @60.2. Rebalance short strangles on Merck by selling puts. Those calls I sold on that -317 Dow day a while back are coming back to bite me. As the rally rolls forward, the pain increases. I keep thinking there has to be a retracement of the move, but so far, it has almost been straight up for the major stock indices.

Mon Sell AMGN Sep 128 puts @134.6. Rebalance short strangles on Amgen as it makes new highs.

Sell SPY Sep 195 puts @200.1. Another day, another layer of index puts sold. The stock market rally rolls on. How much gas does it have left in the tank? How many bears still have money to go short? How many are covering? For those that are still short, what is their cry uncle point?

Sell ASH Sep 105 puts @108.1. Rebalance short strangles on Ashland. A curious case here, where a little while back, ASH gapped lower on earnings, but has climbed steadily since then.

Position Summary:

long GLD

net long ASH DIS IWM SPY

net short AMGN JWN MRK MSFT SWK XLU

net neutral APC BRKB FB FDX HON SLB VRSN

Weekly: Market looks tired

The stock market had a decent up week, but seemed to be running out of gas by Friday. There are more signs of a top, that include the lagging transports (IYT is a good proxy), sentiment at AAII (link) finally at a high bullish reading (46.1% for this week). Confounding most is the continued strength in bonds (TLT). Transports had a deeper correction and have not quite recovered the highs. High yield bonds saw a V-shaped chart (JNK, HYG) with a short sharp decline followed by a sharp rally. However, these are not back to the highs either.

I was not well positioned for the continuing stock rally. So while I made money, it could have been so much better. I added long exposure with each rally day. I am thinking the market needs time to digest the gains before any uptrend continues. Here are the trades:

Thu Sell SPY 194 puts @199.6. New highs for the S&P 500 etf. The chart sets up for a short sale, however, the sentiment and macro picture are not confirming that. I am thinking cover my short calls on a close above 201. Every day this week I have added long delta in the index etfs, but the rally has been so strong, I have barely kept up.

Sell BRKB 135 puts @136.2. The rally in Berkshire Hathaway is causing me some consternation. I had a limit order to close the short BRKB 135 Sep calls, but I cancelled that order as the stock kept climbing. I am going near delta neutral by selling these puts.

Wed Sell IWM Sep 109 puts @115.2. I add longs for the Russell 2000 etf. We are at the highs of 199 for SPY, on lower volume. I am short calls on many stocks so this is a bit of a hedging move.

Tue Sell SPY Sep 190 puts @198.3. I sell another layer of the 190 puts on the S&P 500 as the stock market rally rolls on. The 190 level is below the recent spike low. I expect some resistance at the highs of 199 and at the round number of 200. One negative is that I am burning buying power at a rapid rate selling these layers of SPY puts.

Mon Option expiration frees up a lot of buying power. The gap up open has me scrambling to rebalance my positions. I am short strangles (puts and calls) on many products and the sharp rally means many positions are now net short.

Sell SPY Sep 188 puts @196.8. Rebalance short strangles in the S&P 500 etf to net neutral. Later in the day, I sell a layer of SPY Sep 190 puts @197.3 now net long. My thinking is that SPY seems likely to retest the old highs around 199.

Sell DIS Sep 87.5 puts @90.1. Rebalance short strangles to net long on Disney.

Sell ASH Oct 95 puts @105.8. Rebalance my position on Ashland by selling October puts.

Sell MRK Oct 55 puts @58.6. Ditto for Merck, rebalance by selling October puts.Position Summary:

Position Summary:

long GLD

net long BRKB DIS IWM SPY

net short AMGN ASH JWN MRK MSFT SWK

net neutral APC FB FDX HON SLB VRSN XLU

30-5-2 for August, grade C

Let me start by repeating my public service annoucement on depression and the links in the previous post. It is that important. Free support groups for depression and anxiey

http://recoveryinternational.org/

If a friend or family member is chronically depressed NAMI may be a good group to contact

http://www.nami.org

Now back to the regular programming. The August option cycle was so-so. My self-grade is C. Profits were modest, and could have been a lot better. The count for closed trades is 30 winners, 5 losers, 2 break even. As always, new readers, should not get excited by the high win percentage. Those are the approximate odds going in. The catch is that the profits tend to be tiny, and the losses can be substantial.

Losers include EWG, T, TWX, and WFC. The last three would have been winners if I had held on. Winners include seven layers of puts and calls sold on IWM. AMGN and VRX continue to be my most profitable trading stocks for 2014, even though there was a down move in VRX.

Bonds continue to rally. Gold was flat. The waterfall decline that started in high yield bonds, saw a V-shaped recovery rally. In the news is an etf GURU, which uses the 13F reports to try and follow the smart big money. Looking at the top holdings for that etf can give a person some ideas. The caveat is that smart money doesn't necessarily stay smart, and big money can mean big mistakes.

Seasonal factors point to an upside acceleration in the stock market, starting September 30. Some of the calls I sold during the big dip are deep into the red. Sentiment at the Association of Individual Investors remains right near at its historic average at 39.8% bulls (link).

Going forward, I want to be prepared for an upside acceleration, while still being flexible enough if something else happens.

PSA on Depression plus Weekly

I rarely go off topic on this blog. The apparent suicide of Robin Williams is the event. I volunteer with the mental health group Reovery International

http://recoveryinternational.org/

For those that have friends or relatives NAMI might be a more appropriate group:

http://www.nami.org

If you suffer from chronic depression, please know that you are not alone. There is help out there. Get to a meeting, or find help on line. The depression demons that eventually got Robin Williams stalk many people.

Now back to the week in the stock market. Highlights include selling some puts on SPY. Low lights of the week include adding to a position in JWN before earnings and having it flop. I played BRKB poorly, each move seemed ot result in a bigger ditch. I'll post a monthly summary during the weekend. Here are this week's trades:

Fri Sell JWN Sep 72.5 calls @66.0. Nordstroms earnings report disappoints. Stock gaps lower. I sell some calls to for a tiny premium to hedge my short puts.

Thu Sell IWM Sep 102 puts @113.6. I add more long stock market exposure by selling another layer of puts on the Russell 2000 etf.

Sell BRKB Sep 130 puts @134.2. Ground hog day, another day Berkshire moves up, another layer of puts sold to rebalance. I will close out the short calls on a close above 135.5.

Sell AMGN Sep 120 puts @132.4. Similar deal for Amgen. AMGN having a wild day, first down a couple of points, now up a few. I am short strangles.

Wed Sell BRKB Sep 130 puts @133.2. Rebalance my short strangle on Berkshire Hathaway as the stock continues to rally. 

 

Sell ASH Sep 95 puts @104.2. Similar deal, I rebalance short strangles on Ashland after the stock moves up.

Sell SPY Sep 180 puts @194.1. Ditto. Rebalance short strangles on the S&P 500 etf by selling puts.

Sell JWN Sep 60 puts @67.9. I open a September position in Nordstroms. JWN down today because Macys reported poor earnings. My thinking is that Macys' poor results are in part due to bad weather (snow) during the first quarter. Nordstroms are mostly on the west coast, so the weather issue is much smaller. Earnings are due tomorrow. I am not so bold as to buy calls though.

Mon Sell SPY Aug 189 puts @193.9. I rebalance my net short position in the S&P 500 etf by adding some positive delta. My thinking is that Friday's low is now significant support. 189 is a bit below the low to give a margin of safety. Premium is tiny for this one week option. A bit later I sell SPY Aug 190.5 puts @194.1 as the rally inches higher. Later still, I close a position in SPY Sep 178 puts @194.4, these long puts were part of a backratio. I close this leg at a loss. It seems unlikely that SPY will decline below 178 before September expiration. These three trades bring me to about net neutral on SPY, though that will change as the index moves.

Sell BRKB Sep 125 puts @132.4. Rebalance my short strangle by selling more puts as Berkshire Hathaway rallies.

Sell DIS Sep 80 puts @87.1. Rebalance short strangle in Disney by selling more puts as the stock rallies.

Position summary:

long GLD
net long BRKB IWM JWN SLB XLU

net neutral AMGN APC DIS FB FDX HON SWK
net short ASH MSFT MRK SPY VRSN
expired AIG KORS MON OXY UNH VRX

Weekly: Everyone Says Correction

Long time readers know that I sometimes like to read the public mood through conversations. In the past, these anecdotes have been decent timing tools. Recently, I had three separate conversations with folks talking of a 10% stock market correction. I'm not sure what to do with that, especially because that what I was thinking before hearing these anecdotes. Hmmm. What happens when everyone is looking for a correction? The polar opposite to a 10% correction might be a 10% up move to new highs.

I use two brokers, ThinkorSwim and Schwab. Schwab sends out emails with links to reports with a lot of information. One recent Schwab report was about Fed rate hikes and market reactions. Going on that report, corrections before a Fed rate hike tend to be limited to 6%. Measuring from the highs at 199 that takes SPY to 187 (currently 193). After the rate hike, there tends to be a relatively long time, often a couple of years, before a bear market begins. In a separate article, someone tracking the 4-year presidential cycle calls for a bottom on September 10, 2014. As always, past history doesn't guarantee anything. That said, looking at what happend before often produces better results for me, than seat-of-the-pants or emotion based trading.

In other markets, the German stock market is down over 10% from its recent highs. Bonds continue to be confusing. Eventually, most U.S. traders believe that interest rates are going much higher. However, rates in most of the EU and in Japan are much lower than U.S. rates, even though no one thinks that Spain or Italy is more credit worthy than the U.S. With global markets connected, these rates do matter, even though most small investors don't do anything with foreign bonds. Gold finally shows some strength, though the modest rally it is a far cry from the glory days of the gold bull market.

As for my trading week, I was up a bit for the week with a few more gains than losses. I closed out several trades for losses: T, WFC, TWX, and several other positions went against me. Here are my trades for the week:

Fri Sell MRK Sep 60 calls @56.1. I hedge my short Merck puts by selling calls.

Thu Cover TWX Aug 72.5 puts @72.6. I close out my Time Warner short puts for a 500% loss (basis the premium collected). I am still short TWX Aug 80 calls. TWX keeps falling a day after Fox pulls their takeover bid. My mental stop was 72.0 and TWX went below that before rebounding a bit. Ouch. A bit later I close out the short calls for the slimmest of profits: cover TWX Aug 80 calls @72.3

Sell BRKB Sep 120 puts @128.8. I rebalance my complicated position on Berkshire Hathaway adding to the long side.

Wed Cover T puts and calls @34.6: Buy to cover Sep 35 puts / Sep 37 calls

Big loss on the short strangle in the 400% range vs. initial premium. The rally on news gives way to the reality that a tax-inversion seems unlikely and ATT falters back below the base. Ouch. The calls I close at a breakeven profit but the put side is a big loser after the sharp decline in T.

Cover WFC Aug 50 puts @50.1. I close out my short puts on Wells Fargo for a 20% loss. I do not like the tape action. The open was below the strike price of 50.

Sell TWX Aug 80 calls @74.4. I hedge my short 72.5 puts in Time Warner by selling some calls. TWX down hard as Fox pulls its takeover offer off the table.

Tue Sell MSFT Sep 47 calls @43.2. Hedge short puts in Microsoft by selling calls.

Sell SPY Sep 200 calls @192.9. Add to short position in S&P 500 etf by selling calls. I see SPX 2000 as a likely to be a short term ceiling to any rallies and a good place to get short, if and when the market makes a new high.

Sell SLB Sep 95 puts @107.8. Add to longs in Schlumberger by opening a September position. A few minutes later SLB and the stock market extends to new lows. Sell SLB Sep 120 calls to hedge the just sold puts .18 @107.1. It is a turbulent market.

Sell VRSN Sep 60 calls @54.3. Hedge short puts in VeriSign by selling calls.

Sell BRKB Sep 135 calls @127.4. Hedge short puts in Berkshire Hathaway by selling calls.

Mon Sell VRX Aug 100 puts @116.5. New long position in Valeant Pharma. VRX earnings on 7/31 were a bit disappointing, but the stock is holding in its range for that day.

Sell BRKB Aug 125 puts @129.4. Add to longs in Berkshire Hathaway. Earnings were good. These puts are below the gap up on the news.

Most of the calls I sold short last Friday, could be sold for higher prices today.

Position summary:

long AIG GLD JWN MON SWK UNH VRX VRSN

net long AMGN APC DIS FB FDX HON

net long IWM MRK SLB SWK XLU

net neutral ASH BRKB

net short SPY

closed T TWX WFC

Weekly: Stock market hits iceberg

The good ship stock market hit an iceberg on Thursday. Will the compartment doors hold and limit the damage? Or is it disaster time? I vote for more downside, a modest decline, that may get to about 10% over time. It is over 1000 days since the last 10% correction on the S&P500. 

Trading highlights include closing two long positions, (CMI, EWG), selling calls on many of my long positions, and buying a small slice of insurance (SPY vertical put spread). The chatter on TV and on the Internet is that too many are too comfortable buying this dip. I am looking for a bit more downside, but not a crash. I may look for more longs next week. 

There is a waterfall decline underway in high yield (aka junk bond funds). ETFs such as HYG, JNK, PHB look terrible. Bonds may also be forming a top. The next decline in stocks might also be paired with a decline in bonds. Too many are counting on a replay of the 2008/2009 market when the big stock market decline came with a big rally in bonds. 

This cycle might be that much more painful for asset allocaters that rebalance strictly between bonds and stocks. The place to hide, short term or cash basically pays nothing.

Here are the trades from this red-letter week:

Fri Over the course of the day, I sell calls on many of my longs: Amgen, Anadarko, Ashland, ATT, Disney, Fed Ex, Honeywell, the Russell 2000 etf, Stanley Tools, the Utility etf to lower my deltas. Some talking heads on TV are too happy about buying this dip. I am positioning for further weakness, a glide path down. Selling calls adds another layer of risk: a huge up day would now cause me about as much discomfort as another huge down day.

Sell DIS Sep 95 calls @85.6

Sell AMGN Sep 140 calls @127.3

Sell HON Sep 100 calls @92.3

Sell ASH Sep 110 calls @100.0. Ashland gaps lower after its earnings report.

Sell SWK Sep 95 calls @87.5

Sell FDX Sep 165 calls @147.3

Sell IWM Aug 115.5 calls @110.4

Sell APC Sep 135 calls @105.4

Sell XLU Sep 44 calls @41.5

Sell T Sep 37 calls @35.4

Thu Sell IWM Aug 117 calls @112.4. I rebalance my position in the Russell 2000 etf as the stock market moves lower. I am net long IWM.

Cover EWG Oct 30 puts @29.2. Ouch! I cover these short puts on the German stock etf at a 80% loss. Too much pain, too much exposure for my tastes. U.S. market is now careening lower, and my trading account is suffering its worst day of the year so far.

Buy SPY vertical put spread:

Buy SPY Oct 180 puts / Sell SPY Oct 171 puts @193.8

This put spread on the S&P 500 etf is a slice of insurance. It comes at a cost, but my deltas are increasing so rapidly, I feel like I need more cushion against a 10% or more decline that we are long over due for (over 1000 days without a 10% correction in the stock market).

Wed Sell AMGN Sep 115 puts @129.7. Add to longs for Amgen. AMGN moving higher on earnings. Chart gap is at 124.

Sell MSFT Sep 39 puts @43.4. Add to longs in Microsoft. MSFT down three days in a row.

Tue Seven trades, highlights include new longs positions in MRK, T, closing my position in CMI.

Sell IWM strangles:

Sell IWM Sep 95 puts / Sell IWM Sep 123 calls @113.6

I go even further out of the money than usual, to the single digit probability range on this short strangle on the Russell 2000 etf. Like a lot of traders, I expect volatility to tick up into the fall. I remain net long IWM, short puts and short calls.

Sell ASH Sep 90 puts @108.8. I add to longs in Ashland by opening a September position. ASH has been a steady stock for me in 2014.

Cover short CMI Aug 140 puts @146.6. I close this position for a break even gain (commissions equal profits on trade). Cummings Engine came out with an ok earnings report and moved lower yesterday. I'd rather not stick around for expiration because of the negative reaction to earnings.

Sell FDX Sep 130 puts @148.5. Add to longs in Federal Express by opening a September position on the dip. Competing firm UPS is down on earnings, hurting the group. FDX sometimes does not follow UPS, and FDX is into a three/four day decline.

Sell MRK Sep 55 puts @59.2. New long position in Merck. MRK higher on earnings.

Sell T Sep 35 puts @36.7. New long position in ATT, as it moves up on news, on huge volume. This is a technical chart play. There are likely a lot of sell orders at the current price, holding back the stock.

Mon Add to longs in Disney and Honeywell by opening September positions.

Sell DIS Sep 77.5 puts .30 @86.1.

Sell HON Sep 85 puts .21 @95.1.

Position summary:

long AIG BRKB JWN MRK MON MSFT SLB SWK T TWX UNH VRSN

net long AMGN APC ASH DIS FB FDX HON GLD IWM XLU

net short SPY

exited CMI EWG (covered short puts)