What may be helping the current market rally more than anything else are the recent dominant news topics out of Washington. The White House has successful directed the headline news towards issues such as gun control, immigration, and taken the lead in demonizing the Republicans who appear disoriented and without a cohesive message. The President remains in campaign mode, dictating news events and controlling the dialog. In response to the verbal assaults from the White House, some of the comments from Republican leadership have unsettled a lot of people. Right now the American populace is desperate for viable solutions to the social-economic problems that are becoming a cancer to this country â€“ people are absolutely fed up with the continued partisan bickering. But the point is that economic issues have been pushed to the backburner, which means there is no urgency for an ongoing discussion to address the country's structural financial problems.
The latest news related to the effort to raise the U.S. debt ceiling is that the Republicans prefer to do a temporary debt limit increase and revisit the issue in a few months. People are starting to figure out that raising the debt limit is not related to adding increased spending to the budget, but to pay bills that have already been incurred. If the bills are not paid on time, technically the country will be in default. You either pay the bills you owe or you don't and once again the Republicans risk being characterized as the party of 'No' if they hold out and bring the nation to the brink of insolvency. It might seem like the debt ceiling impasse does not happen often, but that is not true. Since 1917, the first time the ceiling was raised to $11.5 billion, until 2011, when it was increased to more than $14 trillion; it has been raised more than 80 times. In the past 50 years the ceiling has been raised 74 times and 10 of those have occurred in the past 11 years. The Republicans may be trying use the debt ceiling increase to gain leverage when the White House and Congress return to the sequestration debate. If they temporarily raise the debt ceiling, in a few months when it will need to be revisited, the Republicans will probably attempt to include the upcoming budget negotiation. Commingling the debt ceiling and sequestration negotiations will probably provide more leverage to demand spending cuts in return for agreeing to let the government continue to borrow.
As long as the Democrats and Republicans fighting over debt, spending and taxes is somewhat relegated to sidelines, it is reasonable to expect the stock market to continue percolating higher. Investors appear to be discounting a budget crisis from the perspective that no one wants to believe that our elected officials will allow this issue get to get totally out of control and roil markets worldwide. On Friday the Dow and S&P 500 turned decisively higher in the final minutes of trading to close at their best level since December 2007 and all three major averages turned in their third-straight weekly gain. Domestic and global economic news have been the catalyst this week, especially Housing Starts, New Claims (at levels not seen since 2008), and a retail market that has bounced back from the lows of 2012. The January 13th Couch Potato mentioned "... 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..." all the recent buying has been supporting the markets. With treasuries not supplying the returns investors want, they are putting their money into stocks. However, it would be prudent to put this in the proper perspective. The record for equity fund inflows globally was the penultimate week of September 2007, when investors committed $23 billion. The market then briefly visited an all-time high, just before posting its worst year in modern history. Similarly, homebuilders just had their best year since 2008. The queue for first-time claims for unemployment insurance is at its shortest in five years. Market volatility is at five-year lows, and nearly three-quarters of the Standard & Poorâ€™s 500-stock index companies that have reported quarterly numbers have beaten their estimates. The market should be able to hold up for a while, but usually when the public comes crashing in late to the stock party, it is almost over.
The January 13th Couch Potato also said "...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... the path of least resistance is up... the bears have had every opportunity to seize the trend and have been unable to take control since the middle of November...Whenever there has been a pause or pullback that has been an opportunity for buyers to step in and bid prices back up..." The 30 min. S&P 500 index chart below demonstrates how traders are buying the dips to infuse new money into stocks. The green arrows mark where the index closed in the last 30 minutes of trading for the past week. Notice how on each day the price closed higher than the lows of the day. You can see how the price has been gapping down at the open and recovering later in the afternoon as traders bid stocks back up.
SPY Position Update ---------------------------------------------------------------
SPY closed at $148.33 on Friday â€“ the January position closed approx. $1,500 in the black
The January 2nd Couch Potato published a January expiration SPY call spread
On January 16th we suggested closing out the call spread for an approx. $500 gain (see tables below)
The December 27th Couch Potato published a January expiration SPY bull put spread
On January 17th we suggested letting the call spread expire worthless for an approx. $1,000 gain (see tables below)
The January 16th Couch Potato published a February expiration SPY bear call spread (see table below)
SPY Risk Analysis
January options expired and we have not yet had the opportunity to setup a February SPY put spread. Therefore, the risk is stock prices continuing higher and threatening the SPY $150 strike price short call.
TLT Position Update ---------------------------------------------------------------
TLT closed at $119.85 on Friday â€“ the January position closed 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 February TLT 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 $163.09 on Friday â€“ the January position closed approx. $1,100 in the black
The December 17th Couch Potato set up a January expiration GLD bull put spread
On January 17th we suggested letting the put spread expire worthless for an approx. $1,100 gain (see tables below)
The January 15th Couch Potato published a February expiration GLD call spread (see table below)
The January 15th Couch Potato published a February expiration GLD put spread (see table below)
GLD Risk Analysis
Basically, since the end of last year gold has remained in a trading range. Currently, the GLD ETF is priced equidistant between the strike prices of our short call and short put. The most probable risk is to the upside as the current support level held firm during the recent pullback and the price has plenty of room to get back to the December highs.
As with initiating the trade, the decision process for exiting our credit spreads will be simple:
Anytime the market maker is willing to accept a limit price of less than .10 on one of our short strikes, we can buy back all the short contracts and sell the long positions on the same spread. However, if it is a week or so prior to the expiration date, we may be able to hold out for a .05 bid or lower.
If one of our short strikes is penetrated (closing price above below the 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.
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.