The February 3rd Couch Potato opined "...The market remains in a full-blown bullish trend as traders are discounting negative data and celebrating positive news...The market for now is telling us that employment is growing at a decent pace in the private sector and the economy is actually improving...The market is saying the upcoming sequestration and debt ceiling negotiation will be resolved...for now we are trading at multi-year highs with the bears totally muzzled..."
The S&P 500 index continued grinding higher rising for the sixth consecutive week. It was reported that the last time the index rose for the first six weeks of the year was way back in 1971. The S&P gained 10.79% in 1971 and we will have to wait and see if 2013 does as well.
One particular item of concern for the bulls is reports mentioning that corporate insiders have turned aggressively bearish. This is worrisome because corporate insiders â€” officers, directors and the largest shareholders are expected to know more about their companiesâ€™ prospects than the general public. If they were confident that the shares of their companies would soon be trading markedly higher, they wouldnâ€™t be selling them now. Yet they are reportedly selling at a rapid pace. Consider an insider indicator calculated by the Vickers Weekly Insider Report, published by Argus Research. The indicator is a ratio of all shares that insiders have recently sold in the open market to the number that they have purchased. For the week that ended last Friday, this sell-to-buy ratio for NYSE-listed shares listed stood at 9.20-to-1. That means insiders of these companies, on average, were selling more than nine shares of their firmsâ€™ stock for every one that they were buying. The last time a weekly sell-to-buy ratio was worse than this was in late July 2011, right before that yearâ€™s debt-ceiling debate fiasco started peculating. Over the next couple of weeks, the U.S. Treasuryâ€™s credit rating was downgraded, and the Dow Jones Industrials lost 2,000 points. If the corporate insiders are correct, this would indicate the current bullish move could be stalling out sooner than later.
The February 3rd Couch Potato also discussed "...One of the primary reasons for the rush into the stock market is underinvestment. Many of the big institutional investment funds pulled back during the credit crisis...The new month means new inflows and it also means a letup in the some of the selling tied to the January month-end rebalance..." The National Association of Active Investment Managers (NAAIM) survey below confirms that investment managers are using fund inflows to get fully invested in the equity market. NAAIM is a non-profit association of registered investment advisors who provide active money management services to their clients, in order to produce favorable risk-adjusted returns as an alternative to more passive, buy and hold strategies. NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesdays. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group. Of course the responses below might suggest that if there is a price pullback and support doesn't hold it could easily lead to a correction. Investment mangers will be quick to unload equities to avoid losses if they believe the market is turning bearish.
The February 3rd Couch Potato mentioned "...As discussed above, January market action this year was similar to January 2012 when stocks came out firing like gangbusters. The weekly S&P 500 index chart below suggest that from a technical perspective it might be difficult for stocks to go much higher without some sort of pullback. Prices can maintain an overbought level on a daily chart for a while before reacting..." Following up on the analysis above, take a look the AAII chart below. Notice how at this last time last year when the AAII was at the current bullish level, the S&P 500 index continued higher for several months before prices flattened out and finally corrected.
Look at the updated S&P 500 index weekly chart down below and observe the green channel lines drawn at the start of 2012 and 2013. It is eerily similar how the S&P index thus far is replicating last year's price action. Of course the market can correct at any time and when most people least expect it, but prices continuing to move higher a lot longer is certainly not out of the question.
SPY Position Update ---------------------------------------------------------------
SPY closed at $151.80 on Friday â€“ the February position is approx. $300 in the red
The January 16th Couch Potato published a February expiration SPY bear call spread
On February 6th we published a trade adjustment closing out the February call spread and opening a February 22nd expiration put spread (see tables below)
The put spread is approx. $500 in the black (see tables below)
$147 strike price short put delta is -.1196 (88% probability this position will be profitable)
SPY Risk Analysis
As displayed above, after exiting the SPY call spread the risk is the S&P 500 index pulling back and threatening our $147 strike price short put.
TLT Position Update ---------------------------------------------------------------
TLT closed at $117.12 on Friday â€“ the February position is approx. $1,000 in the black
The January 9th Couch Potato set up a February expiration TLT bull put spread
The put spread is approx. $1,000 in the black (see tables below)
$116 strike price short put delta is -.2747 (73% probability this position will be profitable)
TLT Risk Analysis
Treasury bonds recovered after the TLT ETF closed below our $116 strike price short put a week ago. February options expire this Friday and the obvious risk is the TLT price falling again and encroaching on our short put prior to expiration.
GLD Position Update --------------------------------------------------------------
GLD closed at $161.57 on Friday â€“ the February position is approx. $1,800 in the black
The January 15th Couch Potato published a February expiration GLD call spread
The call spread is approx. $1,000 in the black (see tables below)
$167 strike price short call delta is .0247 (97% 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. $800 in the black (see tables below)
$158 strike price short put delta is -.1237 (88% probability this position will be profitable)
GLD Risk Analysis
Basically, since the end of last year gold has remained in a trading range. The most probable risk is gold prices falling below the trading range and threatening our $158 strike price GLD short put prior to February option expiration this Friday.
The recent market surge pushed the S&P 500 index higher and triggered our SPY ETF $150 strike price short call exit rule. As displayed above we adjusted our SPY position by exiting the February SPY call spread and opening a February 22nd expiration put spread.
January option contracts expire this Friday. We need to closely monitor the TLT and GLD put spreads and be prepared to exit these positions prior to expiration 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.