Daily Market Newsletter

December 3, 2016

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Market Commentary

The “Trump” rally faded a bit this week as we saw a classic case of rotation out of former winners….and into beat-up assets from the past two years, such as Financials, Transports, and Energy. I think the case for “growth” is literally right in front of our face and is completely obvious, which is why I’m starting to wonder what I’m not seeing. The US has been in a corporate earnings recession for about the last 18 months, and we’re starting to see the signs of that thawing right in front of our eyes. Cash from earnings that has been hoarded and spent on stock buybacks…..might now start to flow with B2B spending. Rates will rise, but as we saw in 2003-2007, a rising rate environment is not necessarily a bad thing.

I must be missing something, there must be some hidden time bomb ticking in what I universally see as good news across the board…

Actually, I know what it is. I think that the ticking time bomb (for now) is VOLATILITY.

I’m not going to mince words here. I think our economy since 2009 has been marked by timidity and growth through monetary policy, but not growth by risk-taking and boldness. And in doing so, the volatility was completely removed by the market as we marched forward into socializing it. And we saw the result of that…. record numbers of people living off the system instead of contributing to it. Record numbers of cash being hoarded by corporations due to the uncertainties of the regulatory environment. A new record in federal regulations and “red tape” creating an uphill battle with headwinds for any company trying to be competitive.

The net result of this has been an economy and a business environment afraid to take chances, concerned with saying the right thing instead of “acting,” and one that is effectively curled up into the fetal position. This has not been accidental.

I think that most of that will change, but with that change will come a very uncomfortable (for most) lapse into uncertainty and volatility. The velocity of money will increase and it will move very quickly amongst assets, creating a huge amount of uncertainty from the “buy and hold” cadre. In the new Trump economy, fortune will favor the contrarian, the bold, the unafraid….and will leave in the dust those looking for comfort. Are you ready?

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Offensive Actions

Offensive Actions for the next trading day:

I will set up an SPX LP Iron Condor on Monday; see “LP Condors” section below.
I have two EM-based debit spreads on the SPY into year-end; see “Whale” section below.

Defensive Actions

Defensive actions for the next trading day:

Any vertical or diagonal debit spreads that we set up are risk-managed from day one, and no defense is really required.
I communicated specific closing instructions for the AAL time spread, please see “Time Spreads” section below.

Strategy Summary Graphs

Each graph below represents a summary of the current performance of a strategy category. For an explanation of what the graphs mean, watch this video.

Non-Directional Strategies

Semi-Directional Strategies

Directional Strategies

Technical Analysis Section

Market Internals: Volume was “average” Friday. Breadth was mixed with +33 advancers minus decliners.

SPX Market Timer : The Intermediate line flattened within the Upper Reversal Zone, showing a bullish bias. After three straight strong bearish clusters, the SPX took a break over the past few days with no leading signals, however the two weaker timeframes have almost clustered in the lower reversal zone for the second day in a row, which would be a short-term bullish signal. .

DOW Theory: The SPX is in a long term uptrend, an intermediate uptrend, and a short-term downtrend. The RUT is in a long-term uptrend, an intermediate uptrend, and a short-term downtrend. The Dow is in an intermediate uptrend and short-term uptrend.

VIX: The VIX rose .36% to 14.12, back inside the bollinger bands. The RVX fell .68% to 18.91 and is back inside the bollinger bands.

Fibonacci Retracements: The RUT 161.8% extension is up at the 1375 level; that might represent some token level of resistance.

Support/Resistance: For the SPX, support is at 2188 … with overhead resistance at 2214. The RUT has support at RUT 1300 with overhead resistance at about 1347. All three major index charts that we follow are now showing a Golden Cross with the 50 day moving average crossing above the 200 day average.

Fractal Energies: The major timeframe (Monthly) is still charged with a reading of 48. The Weekly chart is now fully-charged showing an energy reading of 57, due to the recent chop. The Daily chart is showing a level of 41 which is quickly coming out of exhaustion. This increases the probability that we’ll continue to see a short-term consolidation in the near future.

Other Technicals: The SPX Stochastics indicator fell to 85, overbought. The RUT Stochastics indicator flattened at 81, overbought. The SPX MACD histogram fell above the signal line, showing a fade of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2117 and resistance at the upper band at 2238 and is below the upper band. The RUT is back inside the Bollinger Bands with its boundaries at 1185 to 1395 and price is below the upper band.

We might be seeing the market pricing in a shift in character out of the recent lifeless Fed-driven economy, and into an unrestrained one. I think this will bring about a big shift in how the market behaves.

Position Management – NonDirectional Trades

I have no positions in play; I will wait on the first significant pullback to allow me to secure put spreads below support.

Offense: I still do not want to set up OTM credit spreads in this low-vol environment until we see real movement to the downside.

I have no current positions.

The price might be pulling into a short-term range. On Monday I will set up an SPX 23DEC 2150/2155*2225/2230 LP Iron Condor for a minimum of $2.50 credit. I will most likely have to move those strike prices around slightly to accommodate for the opening gap.

I have the following positions:

MS 2DEC/9DEC 39/41 Call Diagonal (11/21) was entered for a $1.10 credit. I closed this position (12/2) for a $1.63 debit. This gave me a net loss on the position of $57.
M 9DEC/16DEC 42.5/44.5 short call diagonal (11/28) – entered for a $.98 credit. Exited (11/30) for a $.38 debit; this gave me a net profit of $56/contract after commissions or a 55% return on risk ..
AAL 9DEC/16DEC 45/47 short call diagonal (11/28) – entered for a $.94 credit. Would like to exit for $.40 but at this point if the price pulls back down to the $45.50 level again I should close it out. The Daily energy is starting to coil again and this portends the next leg higher.

Lots of stocks have gone “gonzo” over the last couple of weeks, but if there’s a supply/demand imbalance it does not pay to step in front of them as no technical signal will give you edge. I don’t see any trades that I want to take this weekend.

Early this week I might consider setting up a longer-term calendar spread which has a large range to work with.

I set the risk for these such that I have no “stop” other than closing the position on expiry. If we see a quick downdraft the profits will come quickly; shooting to exit at about half of the credit value.

Please note: If you trade these positions please keep the size small, to the point where you “do not care” about the success or failure of this position.

I have the following positions in play:

SDS Stock – I still own 100 shares of this stock from 2011 and will continue to write calls against this position with every correction/pullback.
VXX Stock – I own 12 shares of this stock and will hold until Armageddon occurs.
SLV Stock – I have 1000 shares of the SLV that was assigned at the $15 level, and will continue to write time against these shares on every rally. I will look to sell more calls in the next bounce higher in SLV.
SSO – The SSO is “gone” and I don’t want it at these levels.
GE JAN17 30 puts (11/28) – I sold five contracts of $30 puts for $.39 credit
TWTR JAN17 $15 puts (11/30) I sold ten contracts of $15 puts for $.22 credit.

Nothing to do at this time with current positions. I will be continuing to “bottom fish” in the subsequent weeks to identify stock candidates that I would want to own long-term.

Position Management – Directional Trades

Thoughts on current swing strategies:

8/21 EMA Crossover -We’ll look for the next crossover, which is happening now. If we see a rapid pullback that pulls the price down to the 21ema I might consider going long with a debit vertical spread.
RSI(2) CounterTrend – Awaiting the next signal.
Daily S&P Advancers – if I see the number of daily S&P500 advancers drop into single digits near the close of any trading day, I will go long shares of the SSO.

Looking for the next edge. Price has been so choppy that it’s been difficult to identify the next edge.

No positions at this time.

I have no positions at the current time.

I would like to set up two Expected-Move trades into year-end. There is normally a persistent bias into year-end and we have the requisite pullback now. Looking at the SPY 28DEC options, the current price is 219.68 and the EM is +/-6.1 points. That gives us an upper target of 225.78 or thereabouts. Both of these are “cheap” trades and I will enter them with a “Viking Funeral” mentality….there is no “stop loss” and I will only close them near the end of the year if there is value to them. Enjoy.

SPY 28DEC 223.5/225.5/227.5 Call Butterfly – I will add this position on Monday morning, currently showing a $.17 debit.
SPY 28DEC 224.5/226.5 Vertical Debit Spread – I will add this position on Monday morning, currently showing a $.15 debit

The “Hindenburg Strategy” is meant to capture “value” from successive corrections that lead up to the final “death spiral” with a Bear Market. The basic principle is to buy 3-month out long puts on the SPY, and to finance those puts by the sale of credit spreads.

To remove the current series of puts, I will look for a move down to and below the SPX 2100 level.

I will be adding the next series of FEB puts if we see a reason to. So far I don’t see a reason to add them. At this point I’d rather let the market play out another few days before adding a FEB position..

I never got the upside “burst” to allow me to sell call spreads above SPY 230 that I wanted; now I can concentrate on selling put spreads at some level below SPY 190. Quite honestly, selling the “financing” trades has been a huge challenge in this low-vol environment.

We currently have the following positions in play with this strategy:

SPY JAN17 193 Long Puts – I entered this position (10/24) for a $1.33 debit.