Stocks are climbing a wall of worry as the past month was the best September price gain in seventy years. At the beginning of the month is seemed that most people were expecting a price drop based technical signals and September being historically the worst month of the year for stocks. Actually, the general perception that the market would not do well in September was probably the best sign that stocks would gain. The past 24 months the stock market has consistently defied analyst predictions on price direction based on historical precedence and economic fundamentals. Now we may be getting to the point where market participants are becoming overly exuberant. Several recently published sentiment indicators confirmed that investors have become significantly more bullish over the past few weeks. Many analysts consider this a contra-indicator indicating that a price pullback is due.
There may be a presumption that after the November elections we might clarity concerning the future direction of economic and fiscal policy; and investors would have the confidence to push stock prices higher. Most people should understand that in general, price direction is unpredictable, but now some high profile investors are casting doubt on further near-term gains. It has been reported that people like Warren Buffet claim they do not believe the recession is over. Also, there are more reports suggesting the federal government is funneling money to financial institutions for the purpose of buying stocks to prop up the market in advance of the elections. Further, Friday's personal income report released by the government sounded positive. But the devil is in the details, and the report also confirmed the economy is still dependent on government spending, and without it we would definitely be in a recession. The government can't spend indefinitely (the republicans may see to that), so the question is how will the market react if/when the government can no longer subsidize the U.S. economy at the current level?
SPY Position Update
SPY closed $114.61 on Friday â€“ the current October position is approx. $1,200 in the red
SPY is ABOVE its current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE its 20-day Bollinger Band SMA (see SPY chart)
SPY is ABOVE its 50-day simple moving average (see SPY chart)
SPY is priced 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 bullish (See SPY chart)
SPY Bear Call Spread
The September 9th Couch Potato recommended an October expiration month call spread
This spread is approx. $1,200 in the red (see tables below)
$115 strike price short call delta is .4700 (53% probability this position will be profitable)
SPY Risk Analysis
We have two weeks until October expiration and SPY is priced close to our $115 strike short call. We will probably need to do a trade adjustment, fortunately we have time left before expiration to modify the risk to the October trade.
DIA Position Update
DIA closed at $108.32 on Friday â€“ the current October position is approx. $800 in the red
DIA is ABOVE its current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE its 20-day Bollinger Band SMA (see DIA chart)
DIA is ABOVE its 50-day simple moving average (see DIA chart)
DIA is priced 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 bullish (See DIA chart)
DIA Bear Call Spread
The September 16th Couch Potato recommended an October expiration month DIA call spread
This spread is approx. $800 in the red (see tables below)
$109 strike price short call delta is .4241 (58% probability this position will be profitable)
DIA Risk Analysis
Similar to the SPY Risk Analysis above DIA is close to the $109 strike short call and we should expect to do a trade adjustment to minimize the risk to our October position.
The rules for exiting the SPY and DIA bear call credit spreads are:
Anytime the market maker is willing to accept a limit price of less than .11 on the short strike, buy back all the short contracts and sell the long positions on the same spread. However, if it is a few days prior to the expiration date, we may be able to hold out for a .05 bid.
If the short strike is penetrated (closing price above the short call) AND after market close, if the delta associated with the short strike 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.
The September 24th Couch Potato Final Comment section mentioned "... We may finally have the breakout everyone seems to have been anxiously waiting on. For a long time we have been harping how convenient the summer long trading range has been to our trades. But, we also noted that inevitably this too shall pass and we anticipated that at some point, trade adjustments would be necessary. Almost on queue, the summer ended and stocks broke through the trading range..." It appeared that a clear upside breakout was imminent â€“ is still may happen, but there are signs suggesting a new trading range. We will probably need to do trade adjustments to modify our risk profile; fortunately we have time to develop confidence for whether we are at near-term resistance level.
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.