The so called 'fiscal cliff' budget negotiation between the White House and congressional leaders is obviously the dominant theme debated among market pundits, analysts, talking heads and all manner of stock market observers. It is becoming apparent that there will be more capitulation on raising revenues and less on cutting spending. We mentioned in previous articles that until the fiscal and monetary cliff deals are signed off on, it is reasonable to expect stocks to continue vacillating with the daily triple-digit prices moves we have been getting lately. Before the end-of-year due date there is absolutely no way that we will get a 'grand bargain' that will come remotely close to addressing the tax law changes and structural spending reform that is required to get the U.S. back to a balanced budget any time soon. As negotiations go down to the wire, expect President Barack Obama, House majority leader John Boehner and Senate majority leader Harry Reid to perform another choreographed news conference to announce an agreement to raise the debt ceiling, save the Bush era tax cuts, unemployment benefits, Medicare payments â€“ items that would cause immediate pain at the beginning of next year. Everything else that is part of the budget discussion will probably get 'kicked down the road'. The truth of matter is that the economy will not fall off a cliff on January 1st as advertised. On January 1st, whether a budget deal is reached of not, any impact will not be instantaneous and unless the stalemate drags on the effect would be barely perceptible to most people. Remember that Congress has the option of waiting until next year to act on deficit reduction and they will probably make any changes retroactive to the beginning of the year.
Someone joked that last Thursday's lunch meeting between President Barack Obama and ex-candidate Mitt Romney involved discussing a proposal for Mitt to be Treasury Secretary. The article mentioned that Romney's background would make him an almost perfect fit. His private equity chops should help him to identify and eliminate waste from bloated federal budgets. After all, he's admitted to liking to fire people. And who better to identify the flaws of the tax code than someone who has made a career - and a fortune of hundreds of millions of dollars - exploiting them? And he is available right now and presumably with a lot of time on his hands!
You have to wonder whether this whole budget impasse episode is starting to set up to be a possible 'buy the rumor' and 'sell the news' event with the fiscal cliff. As confirmed in the daily S&P 500 index Heikin-Ashi chart below the downtrend may have bottomed out in mid-November and began the current short term uptrend. As expected, all the major equity indexes bounced from extremely oversold conditions. Now the indexes are bumping into firm resistance at or around their 50-day SMA's. As discussed in the past, until stocks make a confirmed break above near term resistance, the longer term trend is still bearish. Remember that Heikin-Ashi charts are designed to smooth out volatility and confirm trends. The chart below is signaling the recent S&P 500 index bullish move may be transitioning to range-bound trend.
Another reason to investors to be careful about long term bullish bets is the VIX chart below. Currently the VIX is hovering around its recent support zone identified by the green horizontal line at the 15.0 level. But also, as highlighted below, notice that the last time the VIX was at this level in the middle of October stocks began pulling back into the recent downtrend. The best near term bet is for stocks to fluctuate up and down in a trading range based on the latest news headlines.
SPY Position Update -------------------------------------------------------------
SPY closed at $142.15 on Friday
The November 29th Couch Potato published a December expiration SPY bear call spread (see tables below)
SPY Risk Analysis
We have not had a chance to open a put spread, therefore the only risk is stock prices confirming a new uptrend and threatening our SPY $145 strike price short call.
TLT Position Update -------------------------------------------------------------
TLT closed at $124.79 on Friday â€“ the December position is approx. $1,000 in the black
The November 13th Couch Potato published a December expiration TLT call spread
The call spread is approx. $1,000 in the black (see tables below)
$130 strike price short call delta is .0874 (91% probability this position will be profitable)
TLT Risk Analysis
We have not had the opportunity to execute a put spread, therefore the only risk is treasury bonds trending higher and threatening our December $130 strike price TLT short call.
GLD Position Update -----------------------------------------------------------
GLD closed at $166.05 on Friday â€“ the December position is approx. $1,300 in the black
The November 13th Couch Potato published a December expiration GLD call spread
The call spread is approx. $800 in the black (see tables below)
$174 strike price short call delta is .0644 (93% probability this position will be profitable)
The November 13th Couch Potato published a December expiration GLD put spread
The put spread is approx. $500 in the black (see tables below)
$161 strike price short put delta is -.1628 (84% probability this position will be profitable)
GLD Risk Analysis
Gold crashed this week and now the risk is a continued downtrend encroaching on our December GLD $161 strike price short put.
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.
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.