Market Summary
Most people that follow the stock market are aware that the most of the major indexes are near 52-week highs following six consecutive weekly gains, including highs eight out of the last nine weeks. Stocks prices rocketed straight up from the February 2009 bear market lows with only minor corrections last June and this past January. For most of this Bull Run, momentum indicators and oscillators flashed overbought signals; plus we constantly hear folks qualify this rally as "low volume". But several analysts are beginning to question whether "low volume" is the new norm.

In mid-March 2009, the 3-month DIA average daily volume was around 31,742,000; its current 3-month average is 10,176,000. The SPY 3-month average daily volume was around 354,251,000, now it is 198,511,000. The best answer for the change in volume numbers is that retail traders/investors are not participating in the stock market as they once did. Investors lost trillions of dollars during the recent financial crisis, jobs are still disappearing, the housing market shows little signs of improvement and getting credit is extremely difficult. Plus, don't forget the dotcom bubble is still a relatively fresh memory in the minds of most investors. An analyst reported $11.7 billion in March equity mutual fund net inflows, compared to average $40 billion net inflows experienced during the 1990's when mutual fund investing exploded.

If stocks average volume numbers continues to decline, eventually it will synchronize with our current "low volume" numbers. Institutional money managers have always exerted significant influence over the market, and now they are even more in control (especially considering some of them are playing with our money, courtesy of the government). Professional money managers generally are not inclined to panic and dump stocks at the first sign of weakness, which may be why prices have not experienced a major correction that a lot of people have anticipated. The bottom line is that price advances on low volume still counts and you have to calculate gains or losses on whatever is the closing number. A 70% gain in a little over a year may suggest that the thought that the current Bull Run is not sustainable based on volume numbers should be called into question?

SPY Position Update
Listed below is the status of our SPY Iron Condor trade as of Friday April 9th. This position has been open for 9 days:
The entire position is approx. $400 in the red
SPY closed at $119.55
30-day historical volatility and implied volatility are extremely low - both volatility numbers are near 52 week lows, which is considered bullish
SPY is priced ABOVE its current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE its 20-day Bollinger Band SMA, and 50-day simple moving average (see SPY chart)
SPY is still well ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is EXTREMELY bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is neutral (See SPY chart)

SPY Bear Call Spread
This spread is approx. $1,020 in the red (see tables below)
$121 strike price short call delta is .4117 (59% probability this position will be profitable)

SPY Bull Put Spread
This spread is approx. $590 in the black (see tables below)
$111 strike price short put delta is -.1244 (88% probability this position will be profitable)

SPY Risk Analysis
The S&P rose for the sixth consecutive week as stocks continue to grind higher on lower than normal volume. The bulls are winning their skirmishes with the bears and have convincingly broken through $118 resistance. Unless the bears can regroup and force the SPY price down to around the $115 it might be risky to bet that a short-term top is in place. Until we get a short-term top confirmation, the risk to our SPY iron condor is the $121 short call will be threatened.

SPY Exit Plan
The rules for exiting the SPY credit spreads are:

Anytime the market maker is willing to accept a limit price of less than .11 on one of our short strikes, buy back all the short contracts and sell the long positions on the same spread.

If one of our short strikes is penetrated (closing price above our short call or below the short put) AND after market close, if the delta associated with one of the short strikes is .65 or higher, we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price. Unless this is option expiration week, do not panic and rush to close the trade, many times the market will reverse itself. If one of our short strikes has been violated and there is no price reversal, we cut our losses and live to fight another day.

We opened the SPY Iron Condor as a separate order with four legs each. Exiting this position prior to expiration we will probably “leg out” of the trade by first unwinding either the bear call spread or the bull put spread; and close out the other side of the spread as a separate order. The timing of closing out each side of the SPY Iron Condor is dependent on following our SPY Exit Rules described above.

DIA Position Update
Listed below is the status of our DIA Iron Condor trade as of Friday April 9th. This position has been open for 18 days:
The entire position is approx. at break-even
DIA closed at $110.06
30-day historical volatility and implied volatility are extremely low - both volatility numbers are near 52 week lows, which is considered bullish
DIA is priced ABOVE its' current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE its' 20-day Bollinger Band SMA, and 50-day simple moving average (see DIA chart)
DIA is still well ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is EXTREMELY bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is neutral (See DIA chart)

DIA Bear Call Spread
This spread is approx. $560 in the red (see tables below)
$110 strike price short call delta is .5177 (48% probability this position will be profitable)

DIA Bull Put Spread
This spread is approx. $780 in the black (see tables below)
$105 strike price short put delta is -.0489 (95% probability this position will be profitable)

DIA Risk Analysis
Similar to the SPY Risk Analysis above, the DIA has ended up six consecutive weeks on lower volume. DIA is currently priced at our $110 short call strike price – within a few days we expect to roll the short call to a higher strike.

DIA Exit Plan
If the DIA closing price does NOT pull back and stays above $110 we will roll up the short strike (probably to $111) and stay long at $105.

If the DIA price DOES pull back we will probably roll the short strike up to $111, BUT we should expect to get a better price (lower net debit) on the transaction.

Since the bears have not been able to mount much of a threat over the past few months, it is reasonable to expect our DIA put spread to expire worthless next week. Unless there is a drastic change in the market direction over the next few days, we plan letting our put contracts expire.

Final comment
Friday's market activity was very interesting; it seemed as if the bulls spent all day sucking in air. Then in the last 45 minutes of trading they blew out all the air and pushed stocks to new 52-week highs. Without the bull's last minute, valiant effort, stocks would have traded range bound for another week. Even with Friday's dramatics, stocks ended the week only marginally higher. Unless the bears decide to show up, the bulls will continue grinding higher. However, compared to a few months ago the current pace of stock advances is a more congenial to market neutral trades. We would love a price pullback to relieve pressure on our short calls, but at the very least the current pace is a lot easier to manage.

Gregory Clay

Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.