It is all about the central bankers as investors are fixated on expectations from the U.S. Federal Reserve and European Central Bank (ECB). Both the Fed and ECB have meetings scheduled next week. The Fed's policy statement is due a day before the ECB meeting and investor perception appears to be it is not a question of if, but when will the Fed do the next round of stimulus. The market surged this week in an apparent case of 'buy on the rumor' as traders bid up stock prices while discounting relatively weak economic data and corporate earnings announcements. There were signs the market was ready to roll over, but the shorts got squeezed hard midweek starting with comments from ECB president Mario Draghi suggesting the bank would save the euro by any means necessary. The market gathered further steam when German Chancellor Angela Merkel and French President Francois Hollande seconded Draghi's proclamation by also committing to keeping the euro area together.
U.S. Corporate earnings have been pretty dismal with pre-announcements so far from 54 of the S&P 500, the negative-to-positive ratio for the third quarter stands at 5 to 1, the most negative since the second quarter of 2001, according to Thomson Reuters data. And while 67 percent of the 290 S&P 500 companies that have reported second-quarter results so far have beaten earnings expectations, just 40 percent have beaten revenue estimates, the lowest amount since the first quarter of 2009. Keep in mind that from a business perspective there is continued uncertainty about the future. Regardless of Fed pronouncements about an optimum employment objective, the real deal is all this stimulus action primarily benefits financial institutions. The value added when institutions buy and sell stocks generally does not get transferred to companies operating budgets to hire new employees. Remember that quantitative easing has been going on for several years now and businesses and financial institutions are flush with cash, so having available funds is not the issue. Dysfunctional U.S. government, how the Affordable Care will be administered, how state governments and the federal will deal with ongoing debt and tax policy â€“ these are some of the main issues that will need to be addressed before we can expect companies to really starting hiring folks and investing in the economy.
At this point the path of least resistance for the stock market is up. With institutional investors sitting on ample funds, if the market wants to go higher it will, regardless of the technical signals or fundamentals. In the highly unlikely event the Fed indicates that further stimulus is not on the table, expect equities to crash and burn hard. Conversely, if investors interpret impending action from the Fed and some semblance of a euro debt plan when U.S. Treasury Secretary Timothy Geithner meets with European officials next week, it is reasonable to expect the market to zoom past the early May highs for the year. What we will probably get is continued daily triple digit price moves depending on what is the headline news of the day.
TLT Position Update ---------------------------------------------------------
TLT closed at $128.48 on Friday â€“ the August position is approx $500 in the black
TLT is priced BELOW its current 14-day EMA (see TLT chart down below)
TLT is trading at its 20-day Bollinger Band SMA (see TLT chart)
TLT is priced ABOVE its 50-day simple moving average (see TLT chart)
TLT is ABOVE its 200-day simple moving average (see TLT chart)
Relative Strength Indicator (RSI) is neutral (see TLT chart)
Moving Average Convergence/Divergence (MACD) is neutral (see TLT chart)
The July 16th Couch Potato published an August expiration month TLT bear call spread
The call spread is approx. $500 in the black (see tables below)
$134 strike price short call delta is .1401 (86% probability this position will be profitable)
TLT Risk Analysis
We have not yet had the opportunity to open an August put spread, therefore the only risk is Treasury note prices rallying and threatening the $134 strike price call spread
GLD Position Update ---------------------------------------------------------
GLD closed at $157.54 on Friday â€“ the August position is approx. $200 in the red
GLD is priced ABOVE its current 14-day EMA (see GLD chart down below)
GLD is trading at ABOVE 20-day Bollinger Band SMA (see GLD chart)
GLD is priced ABOVE to its 50-day simple moving average (see GLD chart)
GLD is BELOW its 200-day simple moving average (see GLD chart)
Relative Strength Indicator (RSI) is bullish (see GLD chart)
Moving Average Convergence/Divergence (MACD) is bullish (see GLD chart)
The July 17th Couch Potato published an August expiration month GLD bear call spread
The call spread is approx. $1,000 in the red (see tables below)
$160 strike price short call delta is .3622 (64% probability this position will be profitable)
The July 17th Couch Potato published an August expiration GLD put spread
The put spread is approx. $900 in the black (see tables below)
$148 strike price short put delta is -.0867(91% probability this position will be profitable)
GLD Risk Analysis
The recent market rally pushed gold prices toward recent highs from mid June. If the rally continues the $160 strike price short call will be at risk.
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 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.
Regular Couch Potato subscribers have probably noticed that for the first time in a long while we haven't published a monthly equity index trade. We discussed in the past how risk management is job one with trading and even more so with doing credit spreads (since gains are capped). Successful traders usually take what the market gives them and avoid chasing trades or trading just because they think they are supposed to trade. Part of managing trade risk is recognizing trends and for the past few months' stocks traded range bound (which is more conducive for executing credit spreads). Usually when the market trades range bound for a while it inevitably breaks out into a bullish or bearish trend. If the trend is your friend for the buyer, that same trend is 'unfriendly' for the seller (us) when the trend goes against you. As July options expired there were technical signs suggesting the equity market might break higher or lower. For the past week or so the equity indexes have been making big daily moves up and down (more difficult to manage credit spreads). Plus, volatility levels as measured by the VIX are relatively low which means that you do not receive as much premium for doing credit spreads. Basically as support and resistance zones have expanded we need to exercise discipline and patience to make sure that we don't get into a trade that turns out to be riskier than we are comfortable with.
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.