The December 5th Couch Potato Market Summary mentioned "... Institutional investors want to secure year-end bonuses and will do whatever is necessary to keep stock prices from falling very much. The big boys will probably try to sustain the market at least through the end of the year, unless something serious changes the dynamics completely, and that means the selling pressure will probably be offset by bullish traders..."
The bulls clearly have way too much ammo for the bears to deal with at this point in time. Ammo in this context refers to cash, motivation, and momentum as defined by the current bullish trend, technical and fundamental analysis all favor the bulls. As indicated in the charts below we can expect the occasional minor correction to allow prices to consolidate and absorb overbought conditions â€“ but this is a good thing in a bull market.
The best bet for the bears is that the current bullish trend could soon run out of steam. We have a few weeks until the end of the so called Santa Claus rally, and another week after that for money managers to finish dressing up their portfolios to secure year-end bonuses. Investors have grown complacent as measured by the CBOE Volatility Index (VIX). The VIX is at its lowest level since last April â€“ at which point stocks began their descent to the lows for the year. The American Association of Individual Investors' latest sentiment survey shows bullish sentiment reached a four-week high. What's more, bullish sentiment has spent 14 weeks above its historical average, its longest streak in six years â€“ this is often considered a contrarian indicator. How much longer can the major stock indexes make new highs almost daily? Also how much of the current gains are due to traders attempting to cash in as much profit as they can with the possibility that the Bush tax cuts might not be extended into next year? Over the last 65 years, when the S&P 500 has rallied at year's end, the average gain has been 3.4 percent between Thanksgiving and New Year's. So far, the index has risen 3.5 percent since the start of the period â€“ the bears are hoping that we got all that we are going to get. Bullish bets should be okay until the year-end, but next year is a new year as we should have all learned that when it comes to the stock market expect and plan for the unexpected.
SPY Position Update
SPY closed $124.489 on Friday â€“ the December position is approx. $300 in the black
SPY is priced ABOVE its current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE its 20-day Bollinger Band SMA (see SPY chart)
SPY is ABOVE its 50-day simple moving average (see SPY chart)
SPY is also ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bullish (See SPY chart)
The December 5th Couch Potato published a December Quarterly expiration month call spread
This spread is approx. $205 in the red (see tables below)
$126 strike price short call delta is .31245 (69% probability this position will be profitable)
SPY Bull Put Spread
The November 28th Couch Potato published a December expiration month put spread
The December 5th Couch Potato suggested closing out the entire SPY put spread for an approx. $500 profit (see tables below)
SPY Risk Analysis
All the major indexes are near-term bullish and if the trend continues we might need to adjustment the December Quarterly expiration $126 strike price short call.
IWM Position Update -----------------------------------------------------
IWM closed at $77.75 on Friday â€“ the December position is approx. $1,300 in the red
IWM is priced ABOVE its current 14-day EMA (see IWM chart down below)
IWM is trading ABOVE its 20-day Bollinger Band SMA (see IWM chart)
IWM is ABOVE its 50-day simple moving average (see IWM chart)
IWM is also priced ABOVE its 200-day simple moving average (see IWM chart)
Relative Strength Indicator (RSI) is extremely bullish (See IWM chart)
Moving Average Convergence/Divergence (MACD) is bullish (See IWM chart)
IWM Bear Call Spread
The November 28th Couch Potato recommended a December expiration month call spread
This spread is approx. $1,300 in the red (see tables below)
$76 strike price short call delta is .7780 (22% probability this position will be profitable)
IWM Risk Analysis
The IWM index gapped above the $76 dollar short strike and will need to be adjusted. We will wait to see how traders react to Tuesday's Federal Reserve meeting and then roll the spread up to the end-of-month quarterly expiration. As indicated in the chart above this index is overbought after the recent surge and we want to give the price a chance to stabilize. If we roll up too soon, prices could continue to advance and end up with a larger loss.
Next week standard December options expire and as mentioned above we plan on doing a trade adjustment to roll up the IWM call spread to a December quarterly expiration call spread.
The rules for exiting the SPY and IWM call spreads are:
Anytime the market maker is willing to accept a limit price of less than .11 on one of our short strikes, buy back all the short contracts and sell the long positions on the same spread. However, if it is a few days prior to the expiration date, we may be able to hold out for a .05 bid.
If one of our short strikes is penetrated (closing price above our short call) AND after market close, if the delta associated with one of the short strikes is .65 or higher, we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price.
Small cap stocks are on a tear as evidenced by IWM ETF which tracks the performance of the Russell2000 index. Traders have become complacent and are willing to take on more risk by investing in smaller companies which is why the small-cap indexes are beating the pants off their big-cap brethren and leading the stock market higher. As mentioned above this sudden "sector rotation" means that we have to adjust our IWM call spread, but fortunately this should not be a problem since we can buy additional time by rolling up to the end-of-month quarterly expiration. Also, this suggest that going forward we might need to consider sticking with the big-cap ETFs that are considerably less volatile (which is what you want when doing credit spreads).
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.