Recapping recent Couch Potato commentary "... fundamentals and technical analysis is taking a subordinate role in influencing the current price action...The technical picture remains bullish for stocks intermediate term direction. It is typical for the major stock indexes to make multiple attempts before finally breaking clear to new highs...At this point all eyes are on the U.S. and European central banks...The stars are aligned for Fed Chairman Ben Bernanke & Company to do their next round of quantitative easing...The inevitable poor job numbers provide a convenient cover for the Fed go cart blanch with providing liquidity to financial institutions...As an investor, the mantra to 'not fight the fed' is in full force as the central banks worldwide are 'all in' right now. At this point the path of least resistance for the market is up. With institutional investors sitting on ample funds, if the market wants to go higher it will..."
Whether or not Fed Chairman Ben Bernanke has skin in the game regarding the presidential election he is doing his best to keep President Obama in office. If Obama prevails in the election he needs to promise big Ben a job for life. A lot of pundits incorrectly surmised that the Fed would delay the next round of QE until later in the year to avoid the perception playing politics. Instead, Mr. Bernanke pulled out the big guns in pursuit of his so called 'wealth effect' strategy as he admitted that higher stock prices are one of his criteria for success. Ironically, the high net worth individuals that Obama demonizes in his campaign rhetoric are the primary beneficiaries of the Fed action. If wealthy individuals, business owners, corporate executive, investors etc. are making money from their investments and feeling wealthier, that is less resistance toward another Obama presidency. When the market moves higher you can feel the vibe as even novice investors' brag about making money in the market and the financial media is giddy with anticipation about the next hot stock tip. There is no quantitative study to connect QE with creating any jobs and no one is seriously expecting the employment situation to improve anytime soon, but the wealth effect could create the perception that the economy is getting better. Since Republican presidential candidate Mitt Romney has not yet publicized his detailed economic plans for the U.S. economy, it is easy for voters to go with the perception that the economy is going in the right direction versus another unknown 'change' candidate. Another component of the Obama/Bernanke connection is the QE3 plan for the central bank to purchase mortgage backed securities is expected to lower rates and presumably increase the pool of potential home buyers. This should help the U.S. government unload the backlog of almost 250,000 residential homes in its possession (nearly a third of nations' 800,000 repossessed homes.)
The July 15th Couch Potato mentioned "... The Fed's zero interest rate policy and constant liquidity injections has become a 'drug' to investors as they psychologically are hooked on the need for stimulation. And the Fed has become adept at playing the role of a 'dealer' as indicated by a recent report published by the Federal Reserve Bank of New York...what they found out is that the bulk of equity returns for more than a decade are due to actions by the U.S. central bank...It seems that every time investors get desperate and start scratching for a fix, the Fed pulls up to the curb to provide what they want..." Take a look at the monthly S&P 500 index chart right below. Highlighted in yellow are the approximate announcement dates of recent Federal Reserve stimulus programs. Quantitative Easing version no. 1 (QE1) was introduced to the world on November 25, 2008, QE2 was announced on November 3, 2010, Operation Twist was rolled out on September 21, 2011 and of course QE3 was dropped on us last week â€“ again, these dates on marked in yellow on the chart. We can easily see how each time the Fed provided a fix in the form of QE, the market got high, or went to new highs however you want to describe it. But what is also clear is that each successive round of stimulus produced less of a bullish move compared to earlier QE programs. But the Fed has thus far successfully kept the market on a long term bullish trend and avoided a price crash to pre recession levels even though the world wide economy has serious structural problems.
From a trading perspective the trend is up and as has been the case all summer, whenever prices do pull back a bit, buyers step in to bid shares back up. Further confirmation of a strong bullish trend is the recent slew of bullish accumulation days for the major indexes (higher prices on higher than normal trading volume). Bullish accumulation days are considered 'footprints' indicating institutional investors are pushing prices higher â€“ some of the money that has been sitting on the sidelines is getting in on the action. The massive rally over the past week happened so fast that it pushed most of the major equity indexes into overbought territory. The best bet is probably for prices to stabilize and remain flat long enough for overbought conditions to subside, plus traders usually cash in some gains after such a big move. Until we get a bearish distribution day (lower prices on higher than average volume) it will be difficult to justify expecting a serious price pullback or downtrend. In the near term expect support levels to hold firm and prices to trend higher.
SPY Position Update -------------------------------------------------------------
SPY closed at $147.24 on Friday â€“ the September position is approx. $3,000 in the red
The August 13th ouch Potato published a September expiration month SPY bear call spread
The call spread is $3,000 in the red (see tables below)
$144 strike price short call delta is .69.22 (31% probability this position will be profitable)
SPY Risk Analysis
Based on recent price action we anticipated that the $144 strike price call exit would be triggered and with September options expiring on Friday we plan on adjusting the current call spread to an end-of-month position.
TLT Position Update -------------------------------------------------------------
TLT closed at $118.30 on Friday â€“ the September position is approx $2,500 in the red
The August 9th Couch Potato published a September expiration TLT put spread
The put spread is approx. $2,500 in the red (see tables below)
$120 strike price short put delta is -.7704 (23% probability this position will be profitable)
TLT Risk Analysis
As confirmed in the TLT chart above, treasury bonds crashed immediately after the QE3 announcement as the Fed plan stoked intense inflation fears. Our $120 strike price put exit rule is triggered and we should adjust the trade to an end-of-month position.
GLD Position Update -----------------------------------------------------------
GLD closed at $171.80 on Friday â€“ the September position is approx. $3,400 in the black
The August 13th Couch Potato published a September expiration month GLD bear call spread
On September 12th we published a call spread trade adjustment rolling the $163 short call out to the September quarterly end-of-month expiration $171 strike price and increasing the number of contracts (see tables below)
The September 12th Couch Potato published a September Quarterly end-of-month expiration month GLD bull put spread (see table below)
GLD Risk Analysis
For the past few weeks as traders sensed the next round of QE was inevitable they started bidding up precious metals as an inflation hedge. The Fed announcing what everyone was expecting was not a 'sell the news' event as investors sitting on sidelines jumped in to push gold prices even higher. As confirmed in the GLD chart above, gold is extremely overbought and if prices don't pull back we will cash out of end-of-month adjusted call spread.
As discussed above, the exit rules for our SPY bear call and TLT bull put spreads have been triggered and over the next few days we expect to exit/adjust these positions prior to option expiration on Friday.
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.