Daily Market Newsletter

November 12, 2016

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Market Commentary

Three trading days after the election, markets are not melting down, even though millennials are. If anything, we’re starting to see some trends emerge. Probably the biggest one that I’m seeing is that the expectation of interest rate hikes is rising, so bonds are getting nailed. This also means that the Financials are rallying like crazy because of how deep a hole that they’ve been in for years, as well as the fact that rising rates are good for financials, as it gives them more “room” to work with and gain margin.

But that’s just the beginning, and we’re three trading days in. I think that the next couple of years could be extraordinary. As I’ve been saying for months, we have a huge amount of “energy” available after two straight years of sideways consolidation, we still have a tremendous amount of liquidity looking for yield, and the “animal spirits” might get unleashed in a hurry.

And I think this is why we’re seeing money flow into small caps with vigor over the last few days. The “dividend” game might have played out for now, and GROWTH is going to be the game. If fund managers are putting money into small caps, that “canary in a coal mine” leading indicator might be a good omen for the market.

But it’s not going to happen in a linear manner; we could find ourselves in a “rising rate” environment with nearly every FOMC meeting resulting in a hike, with moderate inflation. This creates competition against stocks, as those seeking certainty will outflow from stocks and into fixed-rate instruments again. To some degree that’s what we saw from 2003-2007, however not with the same Fed Balance Sheet that they are going to be desperately shrinking. Strap on tight!

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Offensive Actions

Offensive Actions for the next trading day:

I’ll set up a Low Probability Iron Condor on Monday morning; see details below.

Defensive Actions

Defensive actions for the next trading day:

Any vertical debit spreads that we set up are risk-managed from day one, and no defense is really required.

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 about average Friday. Breadth was mixed with +13 advancers minus decliners.

SPX Market Timer : The Intermediate line turned up above the Lower Reversal Zone, showing a bullish bias. No leading signals at this time..

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

VIX: The VIX fell 3.87% to 14.17, back inside the bollinger bands. The RVX rose 1.03% to 19.68 and is back inside the bollinger bands.

Fibonacci Retracements: The SPX had retraced more than 50% of the Brexit rally, but not quite 61.8% at SPX 2061. It had also retraced more than 38.2% of the full Feb-August rally. Back up to the highs now and we might start looking at extensions.

Support/Resistance: For the SPX, support is at 2080 … with overhead resistance near 2200. The RUT has support at RUT 1090 with overhead resistance at about 1300. 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 highly-charged with a reading of 54. The Weekly chart is now fully-charged showing an energy reading of 62, due to the recent chop. The Daily chart is showing a level of 44 which is starting to reflect the move to the upside.

Other Technicals: The SPX Stochastics indicator rose to 41, mid-scale. The RUT Stochastics indicator rose to 35, below mid-scale. The SPX MACD histogram rose above the signal line, showing a return of upside momentum. The SPX is back inside the Bollinger Bands with Bollinger Band support at 2088 and resistance at the upper band at 2178 and is at the upper band. The RUT is outside the Bollinger Bands with its boundaries at 1146 to 1266 and price is above the upper band.

If Central Banks go “all-in” to save each sovereign economy, this will not be sustainable in the long run. We will continue to monitor price action that will show us if the character of the market is moving towards a change in character to a Quiet/Trending Bull again. For now, we’re seeing necessary corrective action come in to “shock-start” markets and volatility again. Markets have become complacent to all of the central bank monetary policy and that’s not a good thing..

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 am VERY glad that we did not get too aggressive with the put spreads this week as we would have had some anxious moments during the Tuesday night “limit down” environment. 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 positions right now. I like our chances with a LP SPX Iron Condor right now. Afterhours I show that the approximate strikes that I’d secure with an Iron Condor about 3 weeks out for the 2DEC cycle are at 2130/2135*2195/2200 strikes. I would want to secure a minimum $2.50 credit for this trade, and will likely have to adjust those strike prices slightly on Monday morning. I really want the upper strikes to be near the 2200 level, however. With this trade we are risking a max of $250 per contract. If this is a little rich for your account, you can use the equivalent SPY options and use $1-wide spreads, which will be risking $50/contract.

I have no time spreads at the current time.

If we continue to see grinding upside action, I’ll start to set up weekly diagonal spreads with approximately 1:1 reward-to-risk and 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.
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 – Waiting for the next pullback to sell puts against the SSO, preferably at the 50 level or lower. I keep threatening to sell against something else and it might be time.

Nothing to do at this time with current positions.

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 pullback early next week 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 didn’t see anything worth jumping on this weekend.

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. We were there last week but the NOV position was not profitable. If we see a real “waterfall” decline with the price coming down to about the SPX 2000 level I will at least close the NOV position and hold the JAN to exit as those positions get ATM.

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.

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

SPY NOV 197 Long Puts – I entered this position (8/22) for a $1.56 debit.
SPY JAN17 193 Long Puts – I entered this position (10/24) for a $1.33 debit.