May 22, 2017

Can the Dow (DIA) Continue at this Pace?

I think the answer is obvious.

The Dow pushed higher for the 10th consecutive trading day. The Dow hasn’t seen a streak like this in over 17 years. Three months into the year, the Dow has shot up nearly 11 percent while the S&P 500 has gained 9.6 percent.



















For those of you familiar with the normal distribution model, the Dow is on now firmly entrenched in the  tail portion of the curve. Basically, when we see a streak like what we are currently witnessing in the major market indices a correction is not far behind.

Think about it for a second. The major market indices have reached an all-time high on the back of a 4 year bull run and are now in an overbought state over the longest of time frames. You tell me where the pots odds are most favorable over the short to intermediate-term. The risk is now to the upside. As a result, I will continue to direct my options strategies towards the bearish side. But don’t forget, even though I might side with the bears at the moment, by using out-of-the-money credit spreads I am able to create a margin of error just in case the Dow decides to run a little higher over the next few days.

Moreover, if you truly believe in a statistical approach towards investing you know that the statistics will eventually work themselves out…they always do. It’s all about staying the course and more importantly, consistently keeping your position-sizing at a reasonable level.

Nonetheless, this doesn’t stop newbie traders from doubting the validity of high-probability strategies or any strategy that experiences a a few losses. It is the true, disciplined trader that is able to accept volatility, particularly in the world of options.

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If you are a believer in a statistical approach towards investing please do not hesitate to try one of my options strategies. I use simple mean-reversion coupled with probabilities for each and every trade. Give it a try, it’s free for 30 days.