The chart below indicates that Treasury bond holders are reacting nervously ahead of next week's FMOC meeting. The Fed's bond acquisition program started in 2008 and is designed to stimulate economic growth. But it has become the predominant bidder holding up treasury prices. With recent data showing an improving U.S. labor and housing markets, investors are selling safe-haven assets and buying riskier equities. If the FMOC announcement mentions reeling in treasury purchases, that will probably frighten bondholders. They donâ€™t want to be the last investors holding bonds when the Fed slows or stops buying and prices fall. This growing discomfort was seen when treasury bonds sold off sharply on Jan. 3, after minutes from the Fedâ€™s December meeting revealed several members believing it is necessary to curb the program before year-end.
Similar to downward pressure on treasury bonds, favorable global economic data has reduced gold's appeal as a safe-haven investment. You can see in the chart below how investors are selling gold and buying stocks. Retail traders are still heavy into precious metals and the failure to break through near term resistance contributed to this week's sell-off. Plus, when gold hovered near resistance last week, some investors took the opportunity to convert long positions to bearish trades.
The January 20th Couch Potato mentioned "... 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..." The updated chart below follows up on last week's analysis. You can easily see that for the past few weeks' traders have taken every opportunity to buy the early dips and bid prices higher in the afternoon.
As confirmed in chart below the S&P 500 index finally closed above 1,500 and marked its longest winning streak since November 2004. All three equity indexes turned in their fourth-consecutive weekly gain. Friday was the 8th straight day of gains for the S&P 500 which so far this year has closed higher 12 out of the first 14 trading days and 9 out of the last 10. Since the stock market snapped a five-day losing streak after the fiscal cliff agreement the rally has continued unabated even without huge volume or a sense of a short squeeze.
Another item of note in the chart below is that the S&P 500 index is flashing extremely overbought signals from the Relative Strength Indicator (RSI) and momentum oscillator (MACD). As highlighted in the chart, the last time the index was at its current overbought level was the end of last summer right before stock prices flattened out and led to a correction. Similar to price action this year, in January of 2012, stocks flew out of the gate and rose over 12% in the first quarter. But the S&P 500 gave back most of its gains before closing up 13.4% on the year. The quandary for investors who now want to jump in the market is itâ€™s expensive to initiate new long positions at these price levels, but that doesnâ€™t mean the time is right for bearish trades.
The January 13th Couch Potato mentioned "...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..." Bullish sentiment for that survey was 46.40%. Bullish sentiment decreased the following week but now we can see below in the latest survey the percentage is at an extremely exorbitant level. And of course the last time the bullish indicator was at a similar lofty percentage it preceded the price crash last fall. Without a doubt stocks current bullish move is getting overextended, but similar to what happened last fall the most probable reaction is that stocks will trade range-bound before any significant pullback or move higher.
SPY Position Update ---------------------------------------------------------------
SPY closed at $150.25 on Friday â€“ the February position is approx. $1,300 in the red
The January 16th Couch Potato published a February expiration SPY bear call spread
The call spread is approx. $1,300 in the red (see tables below)
$150 strike price short call delta is .5358 (44% probability this position will be profitable)
SPY Risk Analysis
The SPY price has encroached on our $150 strike price short call. Unless the SPY ETF pulls backs over the next few days we will probably adjust the trade to improve the risk profile.
TLT Position Update ---------------------------------------------------------------
TLT closed at $118.03 on Friday â€“ the February position is approx. $200 in the black
The January 9th Couch Potato set up a February expiration TLT bull put spread
The put spread is approx. $200 in the black (see tables below)
$116 strike price short put delta is -.3154 (68% probability this position will be profitable)
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 $116 strike price TLT short put.
GLD Position Update --------------------------------------------------------------
GLD closed at $160.65 on Friday â€“ the February position is approx. $600 in the black
The January 15th Couch Potato published a February expiration GLD call spread
The call spread is approx. $800 in the black (see tables below)
$167 strike price short call delta is .0975 (90% probability this position will be profitable)
The January 15th Couch Potato published a February expiration GLD put spread (see table below)
The put spread is approx. $200 in the red (see tables below)
$158 strike price short put delta is -.2873 (71% probability this position will be profitable)
GLD Risk Analysis
Basically, since the end of last year gold has remained in a trading range. Investors are abandoning bonds and precious metal in favor of equities. If the current trend continues the most probable risk is to our $158 strike price GLD short put.
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 a short call or 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.