July 26, 2017

One Anomaly After Another

It’s been a while since my last post. In fact, it’s been exactly one month. During that time I received the following email from a long-standing subscriber: I'm sure that you don't need reinforcement for your strategies, but the following summary of SPY by Tom Sosnoff pretty much echoes your take on the current situation. Since October expiration, yesterday’s rally in the SPY marked 12 out of 16 days it’s gone up. Assuming that there’s a 50/50 chance that the SPY will go up or down on a given day, there’s about a 2.78% probability of having only 4 down days out of 16. And it’s unlikely even if you don’t believe that the probability is exactly 50/50. If that weren’t unlikely enough, the SPY is up over 8% since Oct expiration. … [Read more...]

Fooled Again (At Least for Now)

Wow, what a difference a few days make. Should we call this latest rally the Yellen rally? Just two days ago everyone was fearful of a decline, yet now all is forgotten. Now we can all get back to sitting back and comfortably watching the market the five year + bull market continue, right? Wrong. We can't ignore all of the bearish indicators that have entered the market as of late. And these aren't your typical short-term indicators. we are seeing historical extremes that have led to intermediate-term declines. I'm not calling for a crash. I'm just being realistic. We haven't seen a notable, healthy correction in a long, long time. And the lack of a pullback is showing up in the background. We have a lack of hedging activity … [Read more...]

Back in Action…Market Opportunities

The one aspect of trading that most investors don't understand....patience. The newsletter business and its patrons insist that we provide ideas, trades, investments on a regularly scheduled basis. You know, every Tuesday we will provide a trade alert. Or the third Friday of every month we will send you our monthly update with our current stock pick. It's ludicrous. And if you think the market provides opportunities on a regularly scheduled basis, well, you probably should put your money elsewhere because you don't understand the market. Cash is a position. It's one of the hardest aspects for new traders/investors to learn. But once learned, it can be one of the most valuable lessons the market has to offer. As Warren Buffett … [Read more...]

One Sign the Rally Has Matured

The market rally over the last five months has been, well, fierce to say the least. During the first quarter alone the major market indices rallied over 10%. The advance marked the 13th time since 1928 that the S&P 500 made it above the 10% threshold in three months. But how did the market fare after such a nice run? The wonderful folks over at Bespoke Investment Group published the following chart today that gives us some insight into what we should expect going forward.                   As you can see, by most accounts the gains for the rest of the year were limited. Of course, there were a few outliers, but for those of us using strategies based … [Read more...]

Where Might We Be Headed?

A few random thoughts. The S&P 500 (SPY) has pushed lower for three consecutive days. The net loss a paltry 0.9%. But the intermediate to long-term extreme overbought state that had reached record highs has a lot of work left before it gets back to a neutral state. If anything, we now have another target area for our bear calls spreads and if we get a push into a short-term, yes let me repeat, a short-term oversold state in the market, we just might have to add a few bull put spreads. While the push lower hasn't been impressive I still think we have more room to go. How far? Take a look at the chart below.                   The blue lines mark the … [Read more...]

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 … [Read more...]

Bulls Beware…Major Indices at Historic Extremes

Yes, the market has rallied in the face of, well, almost everything. While I have my doubts about the sustainability of the current rally I'm not going to give you the reasons why...because it's only my opinion and as we all know when using a statistical approach towards investing/trading opinions are essentially useless. The Russell 2000 (IWM), S&P 500 (SPY) and Dow (DIA) have recently pushed to all-time highs which has pushed our High-Probability, Mean Reversion indicators to extreme overbought states. Moreover, if you look at the RSI over various timeframes you will quickly notice that most of the ETFs I follow are pegged right now. Typically, when this time of reading occur we see a decent decline short-term decline going … [Read more...]

New Heights…But For How Long?

As we all know by now, the major market benchmarks have pushed to all-time highs. The Dow (DIA) and S&P 500 (SPY) continue to frustrate those of us who sell premium for a living, but given the short-term overbought state I remain comfortable with my current positions. If anything, the current overbought state allows for more opportunities to sell bear call spreads...especially when looking at the longer-term chart below. There is no doubt that the pot odds side with the bears at the moment. Even if we are wrong in our directional assumption, like we have been over the past few months, by using a high-probability strategy a margin of error is inherently created. Basically, you can be wrong, yet still have a profitable trade..that … [Read more...]

Short-Term Reprieve Makes An Appearance….

I am going to keep it very short tonight. The S&P 500 (SPY) took its largest tumble of the year today after reaching an extreme overbought state. My recent directional assumptions haven't played out as planned, but after today all of the positions in my two options selling strategies are in very good shape. In fact, I should be able to take a few profits if we see a short-term continuation of this reprieve. And that's the beauty of credit spreads. You can be completely wrong in your directional assumption and still come out on top. It's all about the probabilities...creating a large enough margin of error (through the selling out-of-the-money credit spreads) to absorb a continuation of the move you are fading. But now that … [Read more...]

Why I Sell Options To The Speculative Crowd

Trading often appeals to impulsive people, to gamblers, and to those who feel that the world owes them a living. If you trade for excitement, you are liable to take trades with bad odds and accept unnecessary risks. The markets are unforgiving, and emotional trading always results in losses. ---Alexander Elder, Trading for a Living I love Mr. Elder's quote. It embodies the typical retail options trader. Why do you think the most popular options strategy among retail options traders consists of buying out-of-the-money straight calls and puts? There is a reason why out-of-the-money options are so cheap; it's because they are the equivalent of buying a lottery ticket. And gamblers love lottery tickets. Look no further than the hype around … [Read more...]