Category Archives: Uncategorized

One Way to Play a Spike in SPY Volatility

February 10, 2016Uncategorizedadmin

We live in interesting times. At the moment things are “so interesting” that the traditional long-term investing approach to, well, investing is not faring so well. Fortunately – and seemingly unbeknownst to far too many individuals – there are alternatives to simply sitting there and “taking it.”

This is a tale of one of those ways. Not necessarily the “best” way mind you. And certainly not the only way. But, hey, its “one way.”

Bull Put Spread in SPY

A “bull put spread” is an option trading strategy that essentially makes money as long as the security in question remains above a certain price. In other words, it does not necessarily require a bullish move in the underlying security for the trade to profit. Anything besides the underlying security falling apart will typically suffice.

There are a few key ingredients that a trader should look for before utilizing this strategy:

*Some reason to believe that the underlying security will remain above the breakeven price long enough for the trade to make money (this typically involves either an obvious support level, a particular chart pattern and/or some confirmation from one or more technical indicators that price will stabilize or move higher).

*High implied option volatility (because a bull put spread involves “selling premium” and has limited profit potential, it is important to sell as much premium as possible. High implied volatility tells us that there is a lot of time premium built into the price of the options).

The Setup in SPY

In Figure 1 we see a bar chart for ticker SPY – the ETF that tracks the price of the S&P 500 Index.

Figure 1 – SPY with Support level and Oversold reading (Courtesy AIQ TradingExpert Pro)

As you can see:

*There is a clear “line in the sand” support level not too far below the recent price level. Does this guarantee that the recent decline will end there? Not at all. But it does provide us with a price level which – if pierced – can serve as a natural stop-loss point. And prices do have a way of bouncing off of major support levels (sometimes?).

*Also, SPY is oversold according to the custom indicator that I created that is highlighted (and which I wrote about here; see Measure #2). Does this guarantee a bounce? Again, not at all. But the indicator in question does show a decent propensity to identify at least short-term turning points for SPY.

In Figure 2 we see that implied volatility for SPY options has “spiked” back up to a relatively high level. Again, this implies that there is an above average level of time premium built into the price of SPY options.

Figure 2 – SPY with high IV (Courtesy www.OptionsAnalysis.com)

Bull Put Spread

As always, what follows is an “example” and not a “recommendation”. But the example trade highlighted involves:

*Selling 6 Feb Week 4 SPY 178 puts @ 1.62

*Buying 6 Feb Week 4 SPY 173 puts @ 0.86

The particulars appear in Figure 3 and the risk curves appear in Figure 4.

Figure 3 – SPY Bull put spread (Courtesy www.OptionsAnalysis.com)

Figure 4 – SPY Bull put spread risk curves (Courtesy www.OptionsAnalysis.com)

A few things to note:

*SPY is trading at 85.43

*The breakeven price for this position is 77.78

*There are only 17 days left until option expiration (so if SPY can stabilize at all these options will start to lose time premium quickly)

*The maximum profit potential is $456 and will be realized if SPY is at 78 or higher as of Feb 26.

*The maximum loss is $2,544 but would only be realized if we still held the position at option expiration and SPY was at 73 or below

*A natural stop-loss level might be just below the breakeven price of 77.78. If hit a loss of almost $0 to as much as -$800 depending on whether that level is hit later or sooner.

Summary

Again, I am not telling you that this is a great trade and that I am recommending it. What I am telling you is that it is a great example of “things to look for” that might make a bull put spread a good choice of strategy:

*An oversold market (or one that appears like it might move sideways to higher)

*High implied volatility

*A “line in the sand” support level that can serve to tell us when we are wrong (price above support = “right”; price below support = “wrong”).

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

http://jayonthemarkets.com/

Bonds Rally…Not Everyone is Surprised

February 3, 2016Uncategorizedadmin

In 2015 there was a great deal of “fear and loathing” related to the bond market. With speculation rampant that the Fed would “finally” raise interest rates, there seemed to be a growing sense of inevitability that the 30-year bull market in bonds was about to end.

And perhaps it will. But as it turns out, it looks like bonds may not go down without a fight.

(See also This is What a Classic Bottom Formation Looks Like (Maybe?))

In Figures 1 and 2 you see updated versions of two charts I included in this article.

Figure 1 – Bonds breaking out of a narrowing channel (Courtesy ProfitSource by HUBB)

Figure 2 – Weekly Elliott Wave count still suggesting a potential bull move for bonds (Courtesy ProfitSource by HUBB)

Likewise in this article I discussed the fact that the U.S. treasury bond market typically trades inversely to the Japanese stock market. Figure 3 displays the performance of t-bond futures (a 1-point move in t-bond futures = $1,000) since 12/31/97 when ticker EWJ (an ETF that tracks the Japanese stock market) is:

*In a downtrend (i.e., the 5-week moving average is below the 30-week moving average), which is bullish for t-bonds (red line)

*In an uptrend (i.e., the 5-week moving average is above the 30-week moving average), which is bearish for t-bonds (blue line)

Figure 3 – T-bond performance when EWJ indicator is bullish for bonds (red line) versus bearish for bonds (blue line) 12/31/1997-Present

Although the bull and bear track record is far from perfect, the point is that there is clearly a difference in performance between the two. As you can see in Figure 4, EWJ remains in a firm downtrend (note at far right of bottom clip that 5-week MA is well below 30-week MA), which i.e., is theoretically bullish for bonds.

Figure 4 – Ticker TLT with buy signals from ticker EWJ (Courtesy AIQ TradingExpert Pro)

Will bonds continue to rally? It beats me. Still the “Risk a few bucks on the chance that bonds surprise the heck out of everyone and rally like crazy” trade that I highlighted in the article is now showing a profit of 55% and is poised for huge gains if by chance this rally somehow continues.

Figure 5 – OTM Directional Butterfly Spread using options on TLT (Courtesy www.OptionsAnalysis.com)

Which is entirely the point of the “Risk a few bucks on the chance that [chosen market/stock/ETF/index here] surprise the heck out of everyone and rally like crazy” trade.

One caveat: As is always the case in the markets, you can see whatever you wan to see in any situation. While most of what I have showed so far is “bullish” for bonds, still TLT is a bit “overextended” at the moment and is in a key resistance range as you can see in Figure 6.

Figure 6 – TLT up against resistance? (Courtesy AIQ TradingExpert Pro)

Summary

I am not telling you to be bullish on t-bonds. Nor am I telling you that the recent rally in bonds is about to peter out.

I am telling you that when “Everybody Knows” that bonds [or whatever] can’t possibly advance in the face of the Fed raising rates [or whatever]……there is a good chance that “Everybody Knows Nothing.”

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

http://jayonthemarkets.com/

Simplify it. Applying a simple, logical system is all you need to reap profits from the markets

February 1, 2016Uncategorizedadmin

The AIQ code based on James and John Rich’s article in the November 2015 issue of Technical Analysis of STOCKS & COMMODITIES, “Simplify It,” is provided at www.TradersEdgeSystems.com/traderstips.htm.

The code I am providing matches the description of the authors’ trend-following system with additional exit rules. The long exit has an additional profit-protect exit that is not coded, but when I ran tests, I used the built-in profit-protect exit set to 80% protection once the profit level reaches 5% or greater.

FIGURE 9: AIQ. Here is a sample equity curve of the trend-following system versus the NASDAQ 100 index for the period 1/2/2000 to 11/06/2015.

Figure 9 shows the equity curve for the system versus the NASDAQ 100 index for the period 1/2/2000 to 11/06/2015. Figure 10 shows the metrics for this same test period. The system clearly outperformed the index.

FIGURE 10: AIQ. Here are the metrics for the trend-following system and the test settings.

The code and EDS file can be downloaded from www.TradersEdgeSystems.com/traderstips.htm, and is also shown below.

!SIMPLIFY IT
!Author: James E. Rich with John B. Rich, TASC Nov 2015 (for Jan 2016)
!Coded by: Richard Denning 11/1/2015
!www.TradersEdgeSystems.com

!INPUTS
mktTrendLen is 50.
IDX is "SPY".
stkLen1 is 20.
stkLen2 is 50.
stkLen3 is 200.
trdBandLen is 8.
pctStp is 0.07.
minBarsSinceBandCross is 10.
maxBarsHold is 10.

!MARKET DIRECTION:
mktClose is TickerUDF(IDX,[close]).
mktSMA is simpleavg(mktClose,mktTrendLen).
mktTrendUp if mktClose > mktSMA and mktSMA > valresult(mktSMA,10).
mtkTrendDn if mktClose < mktSMA and mktSMA < valresult(mktSMA,10).
!mktTrendUp if tickerRule(IDX,stkTrendUp).
!mtkTrendDn if tickerRule(IDX,stkTrendDn).

!STOCK SCREEN FOR UP TRENDING STOCKS:
stkSMA1 is simpleavg([close],stkLen1).
stkSMA2 is simpleavg([close],stkLen2).
stkSMA3 is simpleavg([close],stkLen3).
stkTrendUp if [close] > stkSMA2 
 and stkSMA1 > stkSMA2 
 and stkSMA2 > stkSMA3
 and [close] > 5
 and simpleavg([volume],50) > 10000. !volume in hundreds

!STOCK SCREEN FOR DOWN TRENDING STOCKS:
stkTrendDn if [close] < stkSMA2 
 and stkSMA1 < stkSMA2 
 and stkSMA2 < stkSMA3
 and simpleavg([volume],50) > 10000. !volume in hundreds

!TRADING BANDS:
stkSMAhi is simpleavg([high],trdBandLen).
stkSMAlo is simpleavg([low],trdBandLen).

Buy if mktTrendUp and stkTrendUp 
 and [close] > stkSMAhi 
 and countof([close] > stkSMAhi,minBarsSinceBandCross)=1.
Short if mtkTrendDn and stkTrendDn 
 and [close] < stkSMAlo 
 and countof([close] < stkSMAlo,minBarsSinceBandCross)=1.

PD is {position days}.
PEP is {position entry price}.
ExitBuy if [close] < stkSMAlo * (1-pctStp).
 
ExitShort if [close] > stkSMAhi * (1+pctStp)
 or (PD > maxBarsHold and [close] > PEP).

—Richard Denning

Is it “ByeOtech” or “BuyOTech”?

January 29, 2016Uncategorizedadmin

I am not sure I know the answer to the question posed in the headline. But I do know one thing – biotech stocks are getting killed. If only somebody had warned us that something like this might happen…..Oh, wait, somebody did.

In case you were not aware, biotech stocks (using Fidelity Select Biotech, ticker FBIOX as a proxy) are now 43% off of the high made on July 17th, 2015. On July 17, 2015 I posted an article that included the ominous chart that appears in Figure 1.

Figure 1 – Chart from July 17, 2015 article

Now here’s the interesting paradox. Technically I could argue that I did in fact “call the top”. But if you reread that article you will note that I never actually said “Sell.” It pains me to say it but the fact that FBIOX topped on the very day I wrote the above article is coincidence not prescience. The point of that article was not to “call the top” but simply to warn that danger appeared to be imminent. Imminent indeed.

The other point is that if you are in this business long enough (for example, from say the “Hair Era” in your life to the “Not So Much Hair Era”, but I digress) you will see that various patterns repeat, um, repeatedly (See here and here). If you are paying attention and not afraid to act you can actually do yourself some good (regardless of whether the S&P 500 is rising or falling).

The Difference Between Theory and Reality

There is an important distinction to be made between “theory” and “reality” when it comes to investing and trading. In theory, picking a top sounds like a great idea. In reality, attempting to “call the top” is typically foolish. However, in reality, recognizing danger when it exists is one of the most valuable skills you can develop.

So speaking of reality, consider this example. The chart that appears in Figure 1 provides a warning of danger. Now just suppose you applied something as simple, basic and mundane as a 9-month moving average to FBIOX and decided to sell if and when price drops below said moving average. As you can see in Figure 2, you might have sold FBIOX at the end of August 2015 and avoided a further -32% decline in price from that point.

Figure 2 – FBIOX with a 9-month moving average (Courtesy AIQ TradingExpert)

The bottom line: It really doesn’t have to be rocket science.

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

http://jayonthemarkets.com/

Seasonality in Housing Stocks

January 26, 2016Uncategorizedadmin

Alright, first the Bad News: A) The trend I am going to discuss is not necessarily “timely”, and B) technically, one could say that it is “not working” at this exact moment in time. The Good News is that on a rolling five-year return basis, this trend has yet to show a loss (at least not since I started tracking Fidelity Select Construction & Housing (ticker FSHOX) in 1988.

Bullish Period versus Bearish Period

*The “bullish” period for housing stocks (using FSHOX as a proxy) begins at the close of trading on October Trading Day #7 and extends through the end of the 2nd trading day the following June.

*The “bearish” period for housing stocks (using FSHOX as a proxy) begins at the close of trading on the 2nd trading day of June and extends through the end of the 7th trading day in October.

The Periods at a Glance

Figure 1 displays the annual seasonal chart for FSHOX. As you can see, the tendency has been to stage a strong advance during the so-called “bullish” period and to lose ground during the so-called bearish period.

Figure 1 – FSHOX Seasonal Pattern

To illustrate the difference in performance more clearly, Figure 2 displays the growth of $1,000 invested in FSHOX only during the bullish period every year since December 1988. To date, $1,000 has grown to $60,159 (+5,916%). That’s the good news. The bad news is that since 10/9/15 FSHOX is down -11.6%.

Figure 2 – FSHOX performance during “Bullish” periods (12/1988-present)

Figure 3 displays the growth of $1,000 invested in FSHOX only during the bearish period every year since December 1988. To date, $1,000 has declined in value to $316 (-68%).

Figure 3 – FSHOX performance during “Bearish” periods (12/1988-present)

As you can see in Figure 3 it is not as though FSHOX declines each and every year during the “bearish” period. Still, a gain of +5,915% for the bullish periods versus a loss of -68% for the bearish periods is what we “quantitative types” refer to as “statistically significant”.

Long-Term Perspective: 5-Year Rolling Returns

Figure 4 starts at the end of 1993 and shows the total return over the previous 5-years for both bullish and bearish seasonal periods using FSHOX.

The bullish periods appear in blue and the bearish periods in red.

Figure 4 – 5-Yr. % return for Bullish Periods (Blue) versus Bearish Periods (Red)

There are two key things to note from Figure 4:

*The “bullish” period for FSHOX has gained ground over a 5-year period 100% of the time

*The “bullish” period for FSHOX has outperformed the “bearish” period over a 5-year period 100% of the time

Other figures to note:

*The median 5-year gain for the “bullish” period is +118.4%

*The median 5-year loss for the “bearish” period is (-19.1%)

*The “bullish” period has showed a 5-year gain 100% of the time

*The “bearish” period has show a 5-year gain only 17.4% of the time

One Precedent of Interest

The October 2008-June 2009 period is shown in Figure 5.

Figure 5 – FSHOX 2008-2009 Bullish Period (Courtesy AIQ TradingExpert)

2015-2106 so far appears in Figure 6.

Figure 6 – FSHOX 2015-2016 Bullish Period (so far) (Courtesy AIQ TradingExpert)

Summary

The tendency for housing and construction stocks to outperform between early October and early June (in a significant way) is one of the more persistent seasonal trends ?I have seen. That’s the Good News.

The Bad News is that this trend isn’t doing anybody any good this time around (with FSHOX down -11.6% since October 9th). So that leads to one of two possibilities:

*Housing and construction stocks are just having not able to perform in the current market environment, or;

*Housing and construction stocks may be poised for a decent advance between now and June.

If we are in fact on the brink of a worldwide economic meltdown then there isn’t much chances that building stocks are going to look too good. But if not – and certainly from a contrarian point of view – then these stocks may be worth a look.

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

http://jayonthemarkets.com/