Daily Market Newsletter

December 31, 2016

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Market Commentary

After an extremely turbulent year which featured extreme volatility to begin with and featured nearly-zero volatility for the back half of the year, markets closed shop with about a 2% haircut in the final week as no one wanted a repeat of the beginning of 2016 where the last rat off the ship gets punished. Still, 2016 proved to be a “good” year overall if we look at the net performance of the major indices:

S&P500: up 245 points on the year, or 12.05%.
Dow Industrials: up 2357 points, or 13.54%.
Russell 2000: up 223 points, or 19.67%.
Nasdaq Composite: up 485 points, or 9.91%

Of note also is that the dollar futures rose 3.7% over this time, and ten-year note rates went from 2.23% to 2.446%. What can we deduce from these moves? Looking at the major index averages, I think it’s a very healthy thing that the Russell led markets higher, as that implies more risk appetite from fund managers, ones with larger purse strings than you or me. In addition, seeing the Industrials rally hard is good news on speculation for infrastructure projects and jobs. The fact that the Nasdaq was the laggard is of no concern after leading for several years, and almost single-handedly keeping the rest of the market afloat.

Having the dollar rise will likely keep the Industrials muted going forward, as that may hurt their global markets due to the currency exchange. This is not so much of a problem for small caps as few of those have currency concerns, but they are more rate-sensitive due to being financed almost entirely from debt…..so a rising rate environment may tend to throttle those companies as well.

Overall, I think that we are still coming from an environment where no one expects this market to go higher, or protests that it is. The 2014-2016 correction was a very “real” thing even though no one is giving it credit, so we are nowhere near a “euphoria” state. A rising-rate environment can still support a rising stock market, although it does give alternate investments a home for the first time in a long while.

Conclusion: The overall bull market will continue but the overall “realized” volatility will increase as we transition from a “central-bank” economy into one driven by animal spirits again.

If the above video does not work, please try this link.

Offensive Actions

Offensive Actions for the next trading day:

I’m going to sell more TWTR puts on Tuesday; see “stocks” section below.
Please see the “LP Condors” section below for a new trade on the RUT for Tuesday.
An RSI(2) swing signal is close; see “swing trades” section below.

Defensive Actions

Defensive actions for the next trading day:

Any vertical, butterfly, or diagonal debit spreads that we set up are risk-managed from day one, and no defense is really required.
The new SPX LP Condor is risk-managed from day one and there is no defense other than early exit

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 above average Friday. Breadth was poor with -260 advancers minus decliners.

SPX Market Timer : The Intermediate line fell out of the Upper Reversal Zone, showing a neutral bias. The two weakest timeframes formed a Weak Bullish Cluster in the lower reversal zone for the second day in a row; this can be a leading signal for a bounce.

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 downtrend.

VIX: The VIX rose 5.01% to 14.04, inside the bollinger bands. The RVX rose 2.10% to 19.42 and is inside the bollinger bands.

Fibonacci Retracements: The SPX has retraced about 23.6% of its election rally. The more important 38.2% fib retracement sits at the 2203 level.

Support/Resistance: For the SPX, support is at 2188 … with overhead resistance at 2277. The RUT has support at RUT 1300 with overhead resistance at 1393. 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 44. The Weekly chart is declining with an energy reading of 40, due to the recent breakout. The Daily chart is showing a level of 56 which is completely recharged again; we are seeing the expected short consolidation at this level but it’s not going to last much longer as the daily energy must go somewhere. It appears to be pulling to the downside for now.

Other Technicals: The SPX Stochastics indicator fell to 58, mid-scale. The RUT Stochastics indicator fell to 57. mid-scale. The SPX MACD histogram fell below the signal line, showing a loss of upside momentum. The SPX is inside the Bollinger Bands with Bollinger Band support at 2206 and resistance at the upper band at 2293 and is above the lower band. The RUT is back inside the Bollinger Bands with its boundaries at 1332 to 1398 and price is above the lower band. The Bollinger Bands are starting to squeeze, especially on the RUT.

We are 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. If and when we get this movement we’ll need to identify levels that we want our credit spreads to be “below.” This is the same type of price action that was so perilous to HP condors back in 2013, so let’s not fight it.

If I see price drop to the SPX 2200 level, this might be our first opportunity to sell premium against that level.

I have the following position:

20JAN SPX 2215/2220*2285/2290 LP Iron Condor (12/29) was entered for a $2.50 credit. I have already set my GTC debit exit at $2.00. I will set my risk from day one on this trade and there is no adjustment. The price moving to the downside is actually great news for this position and puts me in a stronger position to succeed with it. .

I would like to add another LP Condor on Tuesday if the current values hold. I am looking at the RUT 20JAN 1320/1325*1390/1395 LP Iron Condor for a minimum of $2.50 credit. I think that it’s important to secure those call spread strikes as they are near the recent highs. I will adjust the strikes prices as necessary depending on Tuesday’s opening gap.

I have no current positions. The quick pullback and IV spike means that time spreads are off the table for the time being, at least until we see the next rally.

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. If the price continues pulling back, I will likely sell more puts against the $13 level if I can secure them for at least $.15 credit.
GE JAN17 30 puts (11/28) – I sold five contracts of $30 puts for $.39 credit. I will look to sell FEB17 $29 puts if the pullback continues.
TWTR JAN17 $15 puts (11/30) I sold ten contracts of $15 puts for $.22 credit. I don’t care about the recent bad press. I will look to sell FEB17 $13 puts for at least $.20 on Tuesday.
RIG JAN17 $12 puts (12/8) I sold ten contracts of $12 puts for $.18 credit. I will see if the pullback gets a little stronger.

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 -This one is gone. Looking for the next crossover. .
RSI(2) CounterTrend – Awaiting the next signal; the SPY RSI(2) is currently showing about 7 and is close to a signal. I would use a 13JAN SPY ATM call spread.
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. Once the S&P hits an exhaustion level on the weekly chart, I will consider a vertical debit put spread to catch any volatility to the downside.

I have the following positions:

SPY 30DEC 228/230 Call Vertical (12/19)- I entered this position for a $.31 debit and it expired OTM on Friday.

No new positions to add next week. We might see some setups show up next week as the price finds support.

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.

Quite honestly, selling the “financing” trades has been a huge challenge in this low-vol environment. I will only sell put spreads on decent pullbacks that allow me to secure put spreads 10% OTM

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.
SPY FEB17 200 long puts – I entered this position (12/7) for a $.95 debit.
SPY MAR17 203 long puts – I entered this position (12/28) for a $1.07 debit.