Comments from recent Couch Potato articles "...The market remains in a full-blown bullish trend as traders are discounting negative data and celebrating positive news...The market is saying the upcoming sequestration and debt ceiling negotiation will be resolved...for now we are trading at multi-year highs with the bears totally muzzled... The S&P 500 index continued grinding higher rising for the sixth consecutive week..."
The update to this comment is the S&P 500 index rose for the seventh week in a row - the last time the S&P 500 opened a year with seven-consecutive weekly gains was in 1967. The S&P 500 index is just 50 points away from his 2007 highs of 1,575 points, similar to the S&P index the DOW Jones Industrial Average that is obsessed with by the media has been flirting with the 14,000 point mark for the last couple of weeks, both close to their all time highs. While the S&P 500 and the Dow Jones have not yet broken above their 2007 highs the NASDAQ already completed this move last year back in February 2012. Sometimes, the NASDAQ and Russell 2000 index can provide a "clue" presaging where the broader market might be headed.
The current stock market rally has primarily driven by excess liquidity and it is reasonable to expect the bullish move to continue indefinitely. The recent surge in merger and acquisition activity, with more than $158 billion in deals announced so far in 2013, is giving a further boost to the stock market as it points to healthy valuations and bets on the economic outlook. Despite gaining over 124% over the last four years, the current bull market has a lower market valuation than the five prior bull markets since World War II had at their peak, suggesting this bull has room to keep running. Currently, the S&P 500 index is trading at a price-to-earnings ratio of just 14.9, based on the index's trailing four-quarter earnings. That is below the 18.8 average since 1998. It is also significantly lower than the peak P-Es in the prior five bull markets in the post-World War II era, which include a P-E of 16.8 in the 2007 bull and a 28.2 P-E at the market peak in 2000. Even a price pullback or minor correction would probably be considered long term bullish as this might encourage investors still sitting on the sidelines to step in and buy cheaper shares. Since the middle of last December, investors have been swooping in to bid stocks back up whenever prices start to dip a little bit.
The liquidity infusion is continuing into equities at the expense of treasury bonds and commodities like precious metals and crude oil. Gold has crashed below its recent trading range to six-month lows as upbeat U.S. economic data has diminished the appeal of safe-haven investments. Of course the news that billionaire investors George Soros and Louis Moore Bacon dumped holdings of gold exchange-traded products contributed the 'herd' mentality of investors stampeding to dump the precious metal. The news reported a U.S. Securities and Exchange Commission filing showed that Soros Fund Management LLC cut its holding in SPDR Gold Trust by 55% in the three months to Dec. 31, while Baconâ€™s Moore Capital Management LP sold its entire stake in that fund by the end of last year. After gold broke below its near term resistance level traders "stop-loss" orders started kicking in and exacerbated the selling. Treasury bonds are struggling to stay above support after plummeting on Wednesday as yields on the 10-year note rose above 2%.
Money is moving into equities from other asset classes primarily because quite frankly, for the objective of generating a respectable return, stocks are the only game in town. The February 10th Couch Potato mentioned "... The National Association of Active Investment Managers (NAAIM) survey below confirms that investment managers are using fund inflows to get fully invested in the equity market..." Even with investment managers allocating all their available funds in stocks there is still a lot of cash on the sidelines. For example, reports are circulating stating that the top 800 college endowments control $400 billion in investable assets. Among these 800 pools of professionally managed capital, US equities represent only 15%. In the meantime, hedge funds are their largest allocation bucket, 20% or $80 billion. The returns have been paltry at best, not even keeping up with the pace of the schools' spending in the past year. It was reported that Yale University posted a loss of just under 1% in their last fiscal year ended June 30th, maybe because they have a meager 6% allocation to US stocks. The alternatives are overpriced bonds, highly volatile commodities, or less-liquid assets like real estate or private equity - in other words, there isn't much of an alternative. This is one of the reason earnings shortfalls are being ignored in the aggregate and even the most skeptical market pundits are coming out one after the other and admitting that yes, stocks are getting more expensive, but not relative to alternatives. As confirmed in the chart below this is one of the reasons the VIX Volatility Index has been hovering around its lowest level of fear since April 2007. Investors apparently have very little concern about stocks going bearish anytime soon.
Typically, the market crashes when most people are in agreement prices are headed up and the least people expect any type of correction. You can always perform technical and fundamental market analysis from different angles to get different evaluations about where the market is headed. For example looking intraday, daily, weekly, monthly, yearly stock charts could signal a different outlook depending on the charting tools used and time horizon you are working with. Not to dismiss the value and necessity for both technical and fundamental analysis when evaluating the market, but at a certain point regardless of what the analysis says, there might be a point where the current trend cannot continue much longer. For example, below is a screen print from a Twitter feed a few days ago. All these stock market sectors cannot continue hitting new high marks, eventually you would expect that something has to give - the obvious question whether it will be sooner than later?
SPY Position Update -----------------------------------------------------------------
SPY closed at $152.11 on Friday â€“ the February position is approx. at breakeven
The January 16th Couch Potato published a February expiration SPY bear call spread
On February 6th we published a trade adjustment closing out the February call spread and opening a February 22nd expiration put spread (see tables below)
The put spread is approx. $900 in the black (see tables below)
$147 strike price short put delta is -.0436 (96% probability this position will be profitable)
The February 12th Couch Potato published a March expiration SPY call spread (see table below)
SPY Risk Analysis
The February 22nd expiration put spread expires next Friday. The risk is SPY ETF crashing and threatening our $147 strike price short put.
TLT Position Update -----------------------------------------------------------------
TLT closed at $116.50 on Friday â€“ the February position closed approx. $1,600 in the black
The January 9th Couch Potato set up a February expiration TLT bull put spread
On February 14th we suggested letting the put spread expire worthless for an approx. $1,600 gain (see tables below)
The February 14th Couch Potato published a March expiration TLT put spread (see table below)
TLT Risk Analysis
We have not had the opportunity to setup a March TLT call spread, therefore the risk is treasury bond prices moving down and encroaching on our March $114 strike price TLT short put.
GLD Position Update --------------------------------------------------------------
GLD closed at $155.76 on Friday â€“ the February position closed approx. $1,500 in the black
The January 15th Couch Potato published a February expiration GLD call spread
On February 14th we suggested letting the call spread expire worthless for an approx. $1,100 gain (see tables below)
The January 15th Couch Potato published a February expiration GLD put spread (see table below)
On February 14th we suggested closing out the put spread if the price dropped on expiration day. Gold opened with a gap down and we closed out the put spread for an approx. $400 gain (see tables below)
The February 12th Couch Potato published a March expiration GLD put spread (see table below)
GLD Risk Analysis
The gold price crash has already breached below the price of our March $156 strike short put. Fortunately there should be plenty of time to wait on the price to settle and do a trade adjustment.
As mentioned above, the February 22nd expiration SPY put spread contracts expire this Friday and we need to be prepared to exit this position. Also, unless gold prices dramatically recover, we will evaluate options to adjust the March GLD put spread.
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.