Signs of a global economic slowdown are weighing on the stock market as the stampede of negative financial data has converted traders to bearish mode. Weak economic data has diminished hopes for a steady recovery, sending stock prices south. Traders worry that weaker hiring, sluggish industrial output, and a moribund housing market are reversing a bull market that has lifted the Dow 20% over the past year. Corporate earnings will probably continue to be strong and most economists expect slow growth, but not a recession. Some analysts have suggested that last weeks massive losses were partially driven by the Federal Reserve's unloading of millions in risky mortgage bonds onto the market. As big banks buy those securities, they dump assets such as stocks and high-yield corporate bonds.
The June 5th Couch Potato Market Summary commented "...what has to be major concern for the bulls is that we are at three consecutive bearish distribution days (down days on higher volume)...most of the other technical chart signals are bearish (RSI, MACD, volume indicators, etc.) If prices break down any further look out below, as firm support will be breached and we will probably be looking at a 'death-cross' (shorter term moving averages dropping below the longer ones). Next week should tell the tale of whether we can expect stocks to vacillate in a trading range, or we are in the midst of a longer term downtrend..."Obviously the 'tale' is a continued downtrend as stocks search for a bottom and the 'death-cross' projection came to fruition. And as confirmed in the SPY chart below, we had more bearish distribution days as institutional investors clearly have been bailing out of stocks. Next week the regular June options expire and the question is whether we will get a relief bounce to help salvage our SPY position. Anything can happen during expiration week, plus stocks are at oversold levels and volatility should increase with quadruple witching day on Friday.
SPY Position Update
SPY closed $127.60 on Friday - the June position is approx. $2,600 in the red
SPY is priced BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW its 20-day Bollinger Band SMA (see SPY chart)
SPY is BELOW its 50-day simple moving average (see SPY chart)
SPY is still ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is bearish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is extremely bearish (See SPY chart)
The May 16th Couch Potato published a June expiration month put spread
This put spread is approx. $2,600 in the red (see tables below)
$129 strike price short put delta is .6178 (38% probability this position will be profitable)
SPY Risk Analysis
Stock prices sank badly last week and the SPY dropped below the $129 short put. June options expire this Friday and over the next few days we expect to adjust the current put spread out to the end of the month.
As mentioned above, June options expire this Friday and the current SPY bull put spread is in a loss position. We will need to get out of this trade over the next few days â€“ ideally, prices would rebound from the current oversold levels to allow a trade adjustment that would mitigate the potential loss.
If the stock prices continue to slide for another week, it would be the first time in 10 years that the market has suffered seven consecutive weeks of losses. The last such stretch began in May 2001 as the dot-com bubble deflated. We will probably need to roll the SPY put spread to the end-of-June quarterly option series to mitigate the potential loss.
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.