The updated S&P P&F chart below signals the index remains below its near-term downtrend (red) line. The December 16th Couch Potato comment is especially relevant this upcoming week "... Traders will be on 'stand-by'...money managers will be tethered to their mobile devices during the end-of-year vacation interlude in case they must react to fiscal cliff news. Traders and analysts will need to be on alert during this holiday..."
Money managers will be sure to pack mobile computing devices in their holiday luggage as Congress adjourned for the Christmas break without a budget deal. Generally, most market analysts are still expecting a budget agreement soon. Risk-on trading is still in play as traders are moving from safe investments like precious metals and treasuries to riskier assets such as small-cap stocks. If the fiscal cliff is resolved, money managers will need to move quickly. The market is open for a half-day on Christmas Eve and closed on Christmas day. Congressional leaders are on vacation and are expected to resume negotiations later in the week. It appears that President Obama and House Speaker John Boehner are willing to do a deal, but the conservative House Republicans are holding fast to their 'no tax hike pledge'. If there is a breakthrough in budget negotiations, traders will only have a few days to reposition assets prior to year-end.
Following up on another statement from last week "...The Volatility Index (VIX) chart below indicates that trading volatility started accelerating this past week. Don't be surprised if volatility remains high as this coming Friday is the last quadruple-witching day of the year when contracts for stock options, stock futures, stock index options, and stock index futures all expire. Unless the unexpected happens and a budget deal is announced, there could be some heavy selling pressure...If stocks make it through this week relatively unscathed the market might be setup to move higher for a Santa Claus rally and January effect..." As noted in the updated VIX chart below the combination of quadruple-witching day and fiscal cliff budget negotiation stalemate contributed to sending volatility soaring on Friday. Volatility should be expected to remain elevated with continued triple-digit daily price moves until a confirmed budget deal is announced.
Without a doubt, at this point the overall market is being driven by emotion more than fundamentals. This melodrama with the fiscal cliff budget negotiations has aligned the equity market for a hard fall if we don't get a resolution over the next week. In the past we have discussed how the American Association of Individual Investors Survey (AAII) is considered a reliable contra-indicator of a near term price move. As shown in the updated survey results down below individual investors have become overly bullish and this typically hints at a market top and impending price pullback. Combined with the S&P 500 index P&F chart above which is stuck below resistance in a near-term downtrend, without a budget deal next week it is reasonable to expect stocks to pullback into year-end. However, if the White and Congress announce a fiscal cliff resolution stocks should break through near-term resistance and start a new uptrend as traders scramble to cover short positions.
SPY Position Update -------------------------------------------------------------
SPY closed at $142.79 on Friday â€“ the December position closed approx. $500 in the black
The November 29th Couch Potato published a December expiration SPY bear call spread
On December 16th we suggested closing out the call spread for an approx. $500 gain (see tables below)
SPY Risk Analysis
As mentioned above we closed out our December SPY call spread and at this point we have no risk from a SPY ETF trade.
TLT Position Update -------------------------------------------------------------
TLT closed at $123.60 on Friday â€“ the December position closed approx. $1,200 in the black
The November 13th Couch Potato published a December expiration TLT call spread
On December 12th we suggested closing out the call spread for an approx. $1,200 gain (see tables below)
The December 16th Couch Potato published a January expiration TLT bull put spread (see tables below)
TLT Risk Analysis
We have not had the opportunity to setup a January TLT call spread, therefore the risk is treasury bond prices crashing further and threatening our $120 strike price short put.
GLD Position Update -----------------------------------------------------------
GLD closed at $160.33 on Friday â€“ the December position closed approx. $1,000 in the black
The November 13th Couch Potato published a December expiration GLD call spread
On December 12th we suggested closing out the call spread for an approx. $1,000 gain (see tables below)
The November 13th Couch Potato published a December expiration GLD put spread
On December 20th we suggested closing out the put spread â€“ gold prices recovered enough during expiration day to approx. breakeven (see tables below)
The December 17th Couch Potato set up a January expiration GLD bull put spread (see tables below)
GLD Risk Analysis
As indicated in the GLD chart above, gold is extremely oversold and has not presented an opportunity to setup a January GLD call spread. Therefore the risk is gold prices continuing to crash and threatening our $158 strike price short put.
Anytime the market maker is willing to accept a limit price of less than .10 on one of our short strikes, we can buy back all the short contracts and sell the long positions on the same spread. However, if it is a week or so prior to the expiration date, we may be able to hold out for a .05 bid or lower.
If one of our short strikes is penetrated (closing price above 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.