Fourth-quarter earnings reporting season kicks into high gear next week as the major indexes consolidate near multi-year highs. Recent quarterly earnings reporting periods have had minimal impact on overall stock prices. Since the second half of last year the trend is relatively reduced volatility as company earning announcements impact the market for only a few hours. The Volatility Index (VIX) has not been over 40 since fall 2011 and has not even stayed above the 20 level for any length of time since last summer.
The current trend is solidly bullish and even the bears' camp would have to admit the path of least resistance is up (even if they grumble about the logic of it). The reason doesn't matter, the bears have had every opportunity to seize the trend and have been unable to take control since the middle of November. This has been a liquidity driven rally with money coming into the market and chasing prices higher. Whenever there has been a pause or pullback that has been an opportunity for buyers to step in and bid prices back up. The market may be ready to take a breather, and if this happens all the money flowing into equity funds could catapult stocks past recent highs. Last week it was announced that equity funds, including exchange-traded funds, took in $18.3 billion for the week ended Jan. 9, the fourth largest net inflows since Lipper began calculating weekly flows in January 1992. Some $10.8 billion poured into equity ETFs, while mutual funds took in more than $7.5 billion, their largest inflow since the week ended May 2, 2001.
The green line on the far right of the S&P 500 Index daily Heikin-Ashi chart below confirms the index's bullish move since the beginning of the year. Also the chart signals the S&P 500 has become overbought â€“ all the major equity indexes are at or approaching overbought conditions. As noted in the chart, the index price usually pulls back when the Relative Strength Indicator (RSI) reaches the point it is at right now. Stocks certainly are due for a pause after the rapid run-up to start the year. And actually, this week stock prices began flattening out and consolidating. If the recent behavior holds true, we should expect the major equity indexes to either pull back a bit or consolidate near resistance to allow the market to absorb overbought conditions.
Another technical indicator that hints at stocks being ready to take a break is the CBOE Put/Call ratios. As indicated in the table below, investors have become extremely bullish as they have predominantly purchased call contracts betting on higher stock prices. The current ratios are getting excessively bullish and a market drop would send investors rushing to buy protection and drive up the premium for put contracts.
We always mention that the American Association of Individual Investors Sentiment Survey is considered a reliable contra-indicator of a near term price move. The most recent survey results show that retail investors are extremely bullish. And of course most investors are usually wrong about where the market is headed so the strong bullish sentiment portends a near term market top and price consolidation.
SPY Position Update ---------------------------------------------------------------
SPY closed at $147.07 on Friday â€“ the January position is approx. $1,300 in the black
The January 2nd Couch Potato published a January expiration SPY call spread
The call spread is approx. $300 in the black (see tables below)
$148 strike price short call delta is -.3860 (61% probability this position will be profitable)
The December 27th Couch Potato published a January expiration SPY bull put spread
The put spread is approx. $1,000 in the black (see tables below)
$135 strike price short put delta is -.0087 (99% probability this position will be profitable)
SPY Risk Analysis
The S&P500 index surged back to a multi-year high and the SPY price is encroaching on our $148 strike price short call. Regular January options expire next Friday and if prices continue moving higher we should prepare to adjusted the bear call spread.
TLT Position Update ---------------------------------------------------------------
TLT closed at $119.85 on Friday â€“ the January position is approx. $1,600 in the red
The December 16th Couch Potato published a January expiration TLT put spread
On January 9th we published a trade adjustment rolling the January bull put spread out to a February expiration put spread (see tables below)
TLT Risk Analysis
We have not had the opportunity to setup a call spread, therefore the risk is treasury bond prices moving down and crashing through long-term support to threaten our February $116 strike price TLT short put.
GLD Position Update --------------------------------------------------------------
GLD closed at $161.06 on Friday â€“ the January position is approx. $700 in the black
The December 17th Couch Potato set up a January expiration GLD bull put spread
The put spread is approx. $700 in the black (see tables below)
$158 strike price short put delta is -.1578 (84% probability this position will be profitable)
GLD Risk Analysis
The regular January option contracts expire this Friday and the risk is gold breaking down through near-term support and encroaching on our $158 strike price short put prior to expiration.
As mentioned above, the January TLT put spread exit rule was triggered and we adjusted the position out to February.
January option contracts expire this Friday and we need to closely monitor the SPY call spread and GLD put spread. Expect to exit these spreads prior to expiration.
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.