April 28, 2017

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 unclosed gaps in the S&P 500 as seen by the proxy ETF SPY. As most of you know, unclosed gaps in major market indices eventually close. Given the 4-year surge and in my opinion a recent blow-off top I expect to see a closure of both gaps as we move closer to the summer months.

Remember, last year the S&P 500 actually had better year-to-date returns, but lost almost all of the early annual gains by early June. I wouldn’t be surprised to the a similar fate for the market in 2013.

But regardless of what I think, it is the strategy that is applied that counts. By using a statistically-based strategy like credit spreads, more specifically vertical spreads we are able to choose our own probability of success. In this case I will be hovering around the 85 percentile.

What does this mean?

It means that if we were selling vertical spreads on say, SPY, we could go as high as the 159 strike in April for a bear call spread and as low as the 147 strike for a bull put spread. Of course, the credit is significantly higher with the bear call spread and given the recent surge it might be a good area to start adding some additional premium (income) in April. Again, for those of you who subscribe to my options strategies, I will be sending out trade alerts in the next day or two…most likely Thursday.

Ben and Janet have some things to say tomorrow that could potentially move the market and I would prefer to stay on the sidelines until after the potential fireworks have passed.

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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.