February 13, 2016
Non-Directional Strategies
Semi-Directional Strategies
Directional Strategies
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Market Commentary
.Well, now – at least – we have a name for what’s happening in the markets: The Great Re-Pricing. After years of monetary policy experiments to ease the pain of The Great Recession, the only thing that truly occurred during that time is “asset price inflation” as the S&P more that doubled during this period. Central Banks never got what they wanted, which was inflation in the regular economy. What we’re starting to see, and few are talking about…..is de-inflation, driven by commodities as they continue to plummet.
Look anywhere that you want and you can find a “Death of Money” report that details how the collapse will unfold, and how you should invest in physical gold, real estate, and learn how to grow crops and collect rainwater. Little wonder why the investor is confused these days, as the Central Banks (FOMC, ECB, etc) really have no idea of what to do to push this very large stone up the hill. Perhaps the real question is why they have a mandate to push it at all? I think that people are coming to the realization that free markets are best left alone, and that “animal spirits” will not run unless you unfetter them.
Need an example? Companies are using their cash to buy back stock instead of invest in acquisitions or other outside investment. The regulatory climate has been so oppressive in recent years that the US Corporate mentality is to “hunker down” and wait it out. The winner in the “Corporate War” has been the consumer, who has never been able to buy a more dizzying array of disposable goods for lower prices, and continues to do so. This “Kardashian” mentality is forming an escape from the realities that jobs are disappearing due to automation and efficiencies, so some companies are able to tap into this and survive, like MCD recently did when they introduced their “all day breakfast” menu.
So the “Re-Pricing” will likely continue into 2016, and will not end until markets “normalize” back to levels before the drug started. I still go back to my earlier commentary in 2014/2015 where I felt that a quick, severe correction could create a “half-way” point to delineate the two “halves” of the secular bull that started in 2009. And this will no doubt be the case if we start an Argentina-style helicopter drop of cash to “rescue” the market once again. We would see S&P3000 by 2018 followed by your proverbial $20 loaf of bread, Weimar-style.
Back to the markets…..Friday was a nice reprieve from the oppressive selling of late, and was driven by a decent bounce in oil. Perhaps the Saudis will blink. In today’s video I’ll discuss how markets will have to move in order to “heal” and go into what would likely be a slow, grinding move north to occupy a couple of months of time before the next break south. That is, unless the “Halfway House” effect that I discussed on Thursday kicks in.
Don’t forget that this Monday is Presidents’ Day here in the US and equity markets will be closed. Futures markets will open in the morning and again in the evening; there will be no newsletter published on Monday.
I did a case study on what Bernie Sanders’ “college for all” plan would do to the retail trader. I have also reviewed Hillary Clinton’s proposed “tax the traders” plan and it does not target the retail trader, only those institutions employing HFT. I am going to keep this posted here as a “sticky” for a while until everyone’s had a chance to review the plan and educate themselves on the impact. I’m not trying to tell anyone how to vote or for whom to vote for, I just want you to understand the impact of the proposed policies to active traders.
If the video above does not play or display, please use this link
Offensive Actions
Offensive Actions for the next trading day:
- The Market has shown its hand for 2016 and the path of least resistance is “down.” This will affect how we create edge going forward; we will look to focus on call spreads above the range, and then be patient enough to sell into the fear when it arrives.
- I have secured MAR SPY bull put spreads at the 157/159 and 153/155 strike prices, and last week we added SPY 206/208 call spreads to somewhat “complete” the Iron Condor for the MAR cycle. Please see the HP Iron Condors tab below for more discussion.
- I added short calls to “cover” my shares on the SLV; please see the “stock” section below for more discussion.
- For us to become more active with our offense, I need to see the price bounce again or capitulate to the downside. There is very little opportunity down at these levels as the risk/reward is poor. We’re also a little early to start setting up put spreads for the APR series, but if the sell-off continues, I will start to zero in on entries because we are now 43 trading days from April expiration and will be starting in earnest in about a week.
Defensive Actions
Defensive actions for the next trading day:
- We have just seen the SPX and the DOW go through a second major correction separated by only three months. I will monitor the FEB DIA bull put spreads for a defensive exit. These bull put spreads have lots of room to work with especially with Friday’s positive action. One thing working in our favor is that time is burning quickly towards FEB expiration and there is less than a week left.
- The only trade which is really requiring any thought is that DIA FEB put spread; please see the HP Iron Condor section below for some actions that I might take Tuesday should new lows show up. The MAR SPY spreads are a huge distance OTM, and my debit spreads are risk-managed from day one. The cash-secured put positions are doing exactly what I want them to do..
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
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Technical Analysis Section
Market Internals: Volume was below average Friday. Breadth was strong with 444 S&P advancing issues vs.54 declining, confirming the bullish divergence that internals were showing on Thursday.
SPX Market Timer : The Intermediate line fell into the Lower Reversal Zone, still showing a Bearish Bias. No leading signals at this time but this chart was very close to showing another bullish cluster this week.
DOW Theory: The SPX is in a long term uptrend, an intermediate downtrend, and a short-term downtrend. The RUT is in a long-term downtrend, an intermediate downtrend, and a short-term downtrend. The Dow is in an intermediate downtrend and short-term downtrend.
VIX: The VIX fell 9.84% to 25.37, inside the bollinger bands. The VIX ratio is 1.40 and still above the mean. The RVX dropped 6.03% to 30.40 and is inside the bollinger bands.
Fibonacci Retracements: We are still tracking the Fib Retracements of the main swing lower from the 2080 level down to about 1812; the last overhead target is the 61.8% Fib retracement at about SPX 1979. The 38.2 fib is at 1915, and the 50% fib is at SPX 1947 which is where resistance came in on the last swing up. The price lost the 61.8% fib retracement of the latest swing up from the SPX 1812 bottom, and as of this week the price “filled in the triangle.”
Support/Resistance: For the SPX, support is at 1810 and 1800 … with overhead resistance at about 1950, 2000 and 2080. The RUT has support at RUT 872 and 958 with overhead resistance at 1100. The RUT, SPX, and DJI charts are now all showing a “Death Cross” with the 50ma below the 200ma.
Fractal Energies: The major timeframe (Monthly) is super-charged again with a reading of 64. The Weekly chart is reflecting the recent linear trending behavior by showing an energy reading of 48, and is starting to recharge due to recent chop. The Daily chart is showing a level of 51 now which was fully recharged from all of the non-linear price behavior and ready to trend again, yet is starting to reflect the recent strong, linear move down off of the 1950 high. The Intraday chart is just going to follow the higher-timeframe energies at this point, however it’s also recovered and fully-charged. The market has the potential for another large move right now.
Other Technicals: The SPX Stochastics indicator rose to 25, above oversold. The RUT Stochastics indicator rose to 17, oversold. The SPX 5/34/5 MACD histograms rose below the signal line, showing a return of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 1827 and resistance at the upper band at 1943 and is above the lower band. The RUT is inside the Bollinger Bands with its boundaries at 953 to 1041 and price is above the lower band.
At this point index charts are one-by-one falling into a Bear Market, so it’s now much less of a mystery as to what we’ll see occur in 2016. Even if the SPX and DJI avoid becoming a true “bear,” we will still see very volatile, difficult price action for likely the remainder of 2016. The price has now re-tested the January lows on the SPX, and now we have to determine if it’s going to get more serious than that and turn into a true “puke” to the downside. The energy is there for this to happen. We also have to consider the possibility of a very strong rally to the upside.
Position Management – NonDirectional Trades
Here are the current positions in play with 4 trading days in the FEB cycle, and 24 trading days remaining in the MAR cycle:
- SPY FEB 177/179 Bull Put Spread (12/21) entered for a $.16 credit; per my recent advisories I rolled out to MAR SPY 153/155, and was able to close this trade on a quick pullback for a $.58 debit.
- SPY FEB 218/220 Bear Call Spread (12/24) was entered for a $.19 credit; negotiated exit debit is $.01.
- DIA FEB 143/145 Bull Put Spread (1/11) was entered for a $.16 credit with a 2x-sized position; negotiated exit debit is currently $.01. It would really take a true crash to take out this position but anything can happen, as we know.
- SPY MAR 157/159 Bull Put Spread (1/15) was entered for a $.16 credit; negotiated exit debit is currently $.10.
- SPY MAR 153/155 Bull Put Spread (1/20) was entered as a rollout entry from the FEB SPY trade for a $.16 credit with a 2x sized position. This position is currently showing a negotiated exit of $.07.
- SPY MAR 206/208 Bear Call Spread (2/2) was entered for a $.15 credit with a half-sized position. The current negotiated debit exit is $05.
Defense: I will play the current positions by Static Risk Management. The SPY MAR series has a tremendous amount of room to work with, an effective 470 point wide iron condor. .
The short-term focus is still on the FEB DIA positions. There are two dynamics in play right now; there is still a lot of distance between the current price and the short DIA strike price, and there are a rapidly dwindling number of days left to trade in this cycle. Yes, I could close down the DIA trade for a profit today but the transaction costs are pretty brutal, so I want to do everything I can to just let the position expire OTM for max profit. The DOW is holding up better than every other index at this point, so as long as the price does not “take out” the January lows just below DIA 155, then I will do nothing.
If I do see the price of the DOW undercut the January lows at DJI 15450 then I will add 10% more DIA puts onto the 143 strike. For example, if I had a 30 contract position, then I would add three additional 143 LONG puts on top of that strike price. This would only help if we see a true crash from this level .
Offense: We are finished with our FEB and MAR cycle offense.
There are now 43 trading days to APR expiry and we are about a week away from truly being “green light” for that cycle. If we see this sell-off extend lower, then we will start to scope out APR put spreads on the SPY. If the price rallies from here, then we’ll look at resistance levels that we want to stay above.
No LP Iron Condors currently in play in this cycle. The current market character is “volatile/sideways” which creates difficult conditions when the realized vol outraces the implied vol. I think that these are more appropriate conditions for the HP Iron Condor, however we might get a shot here soon if the price approaches the SPY 200 level; I think we would see at least a short-term consolidation under that level.
Waiting until the market character rotates back to “quiet/trending” before playing this strategy again. This is a “long vega” strategy which works best in quiet, low-IV markets. (not what we currently have) I am also working on a Diagonal Spread strategy that we can play in a Bearish market, and I hope to have that released to this newsletter shortly. My goal is to see if we can play off of the SPY 200 level with zero downside risk.
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. I sold the FEB $26 call option for $.30 on 1/6/2016.
- VXX Stock – I own 25 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 sold the SLV MAR 15.5 calls for $.23 on 2/8. I do not want to let this position be assigned, so I would roll those calls to APR if necessary.
- SSO – I added the FEB SSO 50 puts (12/22) for a $.70 credit; exit debit is currently $.50. I added the MAR 45 SSO puts for $1.35 credit, and the exit debit is currently $1.00. I will not “defend” either of these positions since I am OK with assignment. Please understand that this “exit debit” is just the current debit-to-exit the position, and NOT a “defensive” exit metric.
Nothing planned for right now; please see my comments above on the SLV position.
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Position Management – Directional Trades
Thoughts on current swing strategies:
- 8/21 EMA Crossover – Nothing in play at this time.
- RSI(2) CounterTrend – This setup is best played on stocks above their 200dma. This signal was showing this week but I will not attempt to use it.
- Squeeze/60 Minute – 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.
At this point we need to find our next “edge” to trade against; this will likely not happen until we have the next “higher low” and next “higher high” set up so that we can start to identify the trading range to position again.
No setups currently in play.
I have no positions at the current time. We are looking for the price to bounce to higher levels so that we can become more aggressive with bearish spread strategies, similar to the Bear Put Spread that we closed recently:
I set up an expected-move play on the dollar index as I think conditions are ripe for a continued rise in this chart. I played the UUP ETF, which appears to have some liquidity and is currently wound up and ready to trend.
I am not really looking to play any candidates this week as the implied volatility is generally too high to be looking to take long-vega spreads.Otherwise, we are still looking for better bearish setups from higher prices instead of chasing positions down in the gutter. A nice, persistent rally will help us to prosecute these, similar to the recent SPY bear put spread that we played for a 100% return. .
I have the following positions in play:
- MAR UUP 26/27 long call spread (2/1) entered for $.17 debit, will hold seeking 100% return on capital.
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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.
On 1/19 I added MAR-cycle financing trades. We’ll have to wait for the eventual rebound before we add the next cycle of long puts. I would like to see a little more upside and a little more complacency on the VIX before reloading with long puts. I do not think that it was worth reloading with long puts on the latest bounce, as I believe that any downside that we’ll experience in the short term would be limited. I am looking for a more extensive, channel-based rally to start to build a mult-legged long put position into.
We currently have the following positions in play with this strategy:
- MAR SPY 158/160 Bull Put Spread financing trade – I entered this position (1/19) for a $.15 credit with a 12 contract position to help finance a future long put position.