The December 25th Couch Potato mentioned "... The major indexes have all moved above their 200- SMA's even though the big money is sitting on the sidelines. Stocks would need to make a confirmed break above the October highs to establish a break out of the recent trading range..."
It appears that traders software program algorithms might have been programmed to kick in and sell the major indexes as prices approached current resistance levels. After staging a nice rally last week, the indexes basically ended this week flat. As indicated in the charts below, stocks sold off every time they got a whiff of near term resistance. It has been suggested that the market's penchant over the last month to sell off shares as prices approached resistance is a systematic underlying asset allocation process by money mangers. As stocks have gotten bid up during the year-end push, traders take the opportunity to cash out on shares they want to sell for whatever reason. And as the new trading year begins, we could see some of the cash currently sitting on the sidelines being reallocated to make bets on certain stock sectors and/or asset classes.
One potential silver lining heading into the New Year is that statistically the market usually surges the year following a flat year. It has been reported that during the past 50 years the median gain following a flat year averaged almost 18%. And don't forget that in 2012 the election year begins in earnest and is typically a market up year. As traders return to work next week the action should begin immediately as on Tuesday the Institute for Supply Management (ISM) is scheduled to release its December manufacturing report. Also on Tuesday the Fed is scheduled to release the minutes from the Federal Open Market Committee December 13th meeting. On Wednesday there is the data on November factory orders along with December motor vehicle sales numbers. ADP will release its December employment results on Thursday and the ISM will report December non-manufacturing data, plus retailers will report December same-store sales results. The week ends with the Friday announcement of the December unemployment rate and nonfarm payroll data. If investors can figure out a way to get past the trepidation about the European debt melodrama we could expect to start the year with the bulls in control of the market.
Regular Couch Potato subscribers might have noted that we advocate trading what 'we see' and not what 'we want' with regard to making a market direction prediction. Of course it is prudent to consider investor sentiment, current trends, etc. to be able to evaluate the relative risk involved when considering a bullish or bearish position. But we are going to go against character and go out on a limb to make a bold proclamation â€“ the buy and hold investment strategy is DOA (yes, I know this is not much of a limb)! The S&P 500 literally ended the year almost exactly where it began, down a miniscule 0.003 percent â€“ the closest beginning to end yearly finish since 1947. The index ended the prior decade with first negative return since data started recording in 1927. So, for the S&P 500 we have a flat week, flat year, and a flat decade. It is absolutely amazing with the information available that people still want to participate in the market utilizing a primary buy-and-hold stock strategy. Apparently, some retail investors do their analysis, get lucky with a few long stock positions, and think this strategy has sustainable merit. We constantly advise people that stock investing is fine, but they should at least hedge long positions with put options or collars. Even though the stock market has been flat over the long run, recent volatility is double the decade average as the major indexes alternated between the April three-year high and October lows. The point is that anyone who directly participates in the stock market should have a defined trading strategy including entry criteria, exit/stop loss plan, account size allocation per trade, etc. My personal opinion is that there are plenty of good opportunities to generate trading profits in the current market environment; one just needs a plan â€“ and not buy-and-hold!
SPY Position Update
SPY closed at $125.50 on Friday â€“ the January position is approx. $1,000 in the black
SPY is priced 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 priced ABOVE its 50-day simple moving average (see SPY chart)
SPY moved ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is neutral (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bullish (See SPY chart)
The December 15th Couch Potato published a January expiration SPY bull put spread
This put spread is approx. is approx. $1,000 in the black (see tables below)
$114 strike price short put delta is -.0714 (93% probability this position will be profitable)
SPY Risk Analysis
We did not get an acceptable price on the January call spread call spread that we attempted to trade; therefore the only risk is a price crash threatening our January short puts.
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. However, if it is a few days prior to the expiration date, we may be able to hold out for a .05 bid.
If one of our short strikes is penetrated (closing price below our short put ) AND the delta rises to .65 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 and remove the sense of urgency. 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.
As mentioned above, on Wednesday we published a January SPY call spread. But as confirmed in the SPY 60 min chart below, prices plunged the following day and never fully recovered at weeks end - therefore we did not get an acceptable price on our call spread. Regular Couch Potato subscribers are aware that the articles preach ad nauseam about maintaining trading discipline by adhering to our ordering rules and letting the trade come to us. Traders return to their trading desks next week and as mentioned above, there is a plethora of economic data scheduled to be released that might move the market (up or down). Traders are sitting on a ton of cash and could very easily plow through the top of the major indexes condensed trading ranges. If stocks surge higher, then with three weeks left until January option expiration, we might have an opportunity to get a lot better deal on call spread(s)
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.