Posted by Martin February 22, 2018
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Another day on Wall Street


Another rocky week on Wall Street. Markets recovering falling recovery. Is this the end of a pullback? The morning trading looked promising as the markets opened higher (about 11 points) and soon reached almost 30 points gains. But I decided to wait and see how this rocky boat floats.

 
S&P500
 

In the morning, I planned to open a new trade using SPX but since expiration for those trades would be on Friday (tomorrow) I wanted to give the market little time to go against me. So I decided to wait.

Yesterday, I posted in our Facebook group:

All trades put on today morning are in good shape to expire worthless. I will not be closing them but let them expire (unless this trend reverses sharply in the next 1 hour and a half).

I decided not to place a buy back orders on those trades as I pretty much considered them finished as winners. Well, the sharp reversal happened in the last one hour and a half. The stocks dropped and those trades turned into losers. When I could close them as winners for 0.05 debit (when the market was high) I didn’t and had to be closing one trade for 0.15 debit (still a winning trade though) and roll the other. It made me mad at me! And that made me think that I should place the buy back orders all the time no matter what the trade looks like in the morning as in this market, it can change all by lunch time.
 

Later during the day the market started losing its morning steam again and the gains were fading away. This seems to indicate that traders are selling any strength and shorting this market. However, this behavior is still within my overall expectation of the correction recovery. I never expected it to be a straight line up but a bumpy road.

 
S$P500
 

If you looked at futures early in the morning (about an hour or two prior to market open, you could see a very read deep decline (at night, the futures were as low as 2686 but recovered to 2702 by 6 am):

 
S$P500
 

So what pushed the markets up this morning?

Interestingly, we are witnessing what we have already witnessed for some time in the last decade. FED prompting and saving the market rather than focusing on monetary policy. I remember many times when markets were falling during Yellen chairmanship one or another FED official stepped out and said something to prompt the markets back up (or sometimes they said something crazy and slashed the markets).

This morning, St. Louis Fed Head, James Bullard, commented that “”The idea that we need to go 100 basis points in 2018, that seems like a lot to me… Everything would have to go just right. The economy would have to surprise on the upside a bunch of times during the year. I’m not sure that’s a good way to think about 2018.”

And viola! S&P500 jumped up and opened in green. And continued higher to almost 30 points gains… just to lose it in the afternoon again.

 

 · Trading activity today

 

A summary of today’s opening and closing trades.
(balance + $0.00)
 

 
S$P500
 

Since the market is struggling now I am most likely going to be aside and just managing existing trades. We may most likely trade in a range but before I enter into that range, it needs to establish itself first.

We see weakness in the markets and that also suggests we may be sliding lower. Some technical analysts suggest that the market must close below 200 DMA to call this correction over and historically it may be the case as most of the corrections did close below 200 DMA but there were a few instances when this didn’t happen. This time we may see another exception to the rule. But do net bet on it. Caution is definitely advised.

Short term (maybe a few weeks ahead) we are in bearish pattern, long term we are still bullish. Remember, the economy is still very strong and expanding. Bear markets are not happening into a growing economy.
 
 






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Posted by Martin February 21, 2018
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Rising economy, rates – rattle… falling economy – die


Earnings growth for the S&P 500 and Nasdaq 100 in 1Q 2018 have come in at +14.8% and +16.1% year-over-year, respectively.

And rattled investors are worried about inflation and interest rates. I wonder what they will do when the music really stops?

I guess they will crap not just their pants… maybe even die.

Today’s trading was really rocky. We were up 25 or 30 points, then FOMC meeting. And tanked on good economic outlook and rising interest rates. Did the world got mad already? In growing economy rising interest rates is bullish for the stocks. Yes, if you had high interest rates high inflation and faltering economy then you should be worried. Not now.

Yet it seems, investors, are forgetting it. If we have strengthening economy and the outlook for 2018 is about 15% growth (earnings) the interest rates and inflation is not an issue! What all this freaks expected? That FED would say, “well economy is great and expanding, so we will do nothing”? And let this economy overheat and hit the wall?

Yes, this bull market will end one day, this economy will cool down and we will enter a recession. But we are not there.

However, we saw a nice recovery from the lows so far and it seems, it is time to cool down a bit. We may see some pullback.

Today’s price action showed that this market has a lot of weakness. Although higher interest rates are historically bullish (in expanding economy) the so-called investors are rattled about it. There is a chance that we will see a pullback in this market. Still there is no reason for re-testing the lows.

All those predicting that the markets will crash again and retest February lows are wrong.

 
S&P500 outlook
 

History shows that when markets rallied making 4% gains within 2 months, then made at least 1 new all time high within those two months, and then corrected, and wiped out all those gains in just 7 days then the markets usually recovered withing the next 1 to 3 months.

This process happened during December – January when markets rallied and provided 4% gains. They also created not 1 but several new all time highs in those two months and then wiped it all out in 7 days in early February correcting more than 10%. Historically, this was a bullish set up for the markets. In several past occurrences sine 1939 the market never continued lower (except during major reversals to bear markets, which we are not in a bear market at all). It always recovered. It was a bumpy road but it took in average 1 – 3 months for the market to recover the 10% correction and actually created new highs.

Only in 1 instance out of 16 (since 1950) the market re-tested the previous lows.

The strength of the market, economic growth and overall state of the US economy indicates that we will follow the same path and recover the losses from early February.

And again, if you follow me, you know that I do not predict the market, not even try to do so. I actually dismiss predictions and consider them futile wasting of time. However, I do try to identify patterns, repetitions, trends, and supports-resistances and then trade in accordance with them. However, I approach it knowing that it is my bias, my perception of the market, and that I may be completely wrong. So, putting on a trade with expectation of the recovery as per historical precedents, I still take it that such trade may turn to be a complete loser. Thus have a plan how to adjust a complete loser to a winner (or at least break even or small loss).

Let’s see how this plays out.

My outlook is still bullish and I still think that this market is heading up. Nevertheless, if my view is wrong, I am prepared to adjust my trades and ride it down.

 

 · Trading of the day

 

Today, I opened a few trades which until after about 2:30 pm ET those trades were in a great shape to expire worthless. Then investors rattled themselves, crapped their pants over interest rates and 30 point gain in S&P 500 evaporated to a 14 point loss.

Most of my trades closed except one which I rolled to a 9 DTE expiration and down. Futures do not look good, however, it still may change. If not I will be rolling or converting into calls should this develop into more selling.

 
This still is a dip buying opportunity!
 

A summary of opening and closing trades.
(balance + $201.75)
 

February 21 trading1
February 21 trading2
 

Good luck!






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Posted by Martin February 20, 2018
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So Walmart (WMT) slowed down… OMG, end of the world!


Today, the markets paused their recovery streak and dropped approx. 16 points (-0.58%). I have seen a few panicking about it already predicting the end of recovery and another crash.

There are many predicting that S&P 500 will now reverse down and re-test the previous lows.

When too many expect one thing, it for sure doesn’t mean that it will happen.

 
S&P 500
 

However, as I mentioned before, I think, this is not the case. In the past, when markets dropped sharply like what we have seen early in February we saw a recovery and not new selling.

Historically, when the market rallied making 4% gains within 2 months of the rally, then made 1 new all time high within those two months, and then corrected, wiped out all those gains in 7 days then the markets usually recovered withing the next 1 to 3 months. Of course, we will see some ups and downs but we should not see any significant selloff.
 

In fact, I believe, this bull market is not dead and it will make new all time high before the bull dies.
 

It will take time for rattled and spooked investors to finally calm down and realize how foolish they were.

And times like this will create great opportunity!

 

 · New opportunities

 

In my previous note I wrote that I was deciding which of the stocks to buy using my options trading profits. Many of the stocks in my watch list went into “correction” mode and it was really difficult to choose a stock with limited cash. And I expressed a worry that I may have missed my opportunity to buy cheap.

How wrong was I!

It is evident that out of the fear of others, usually those with no investing plan, goal, or rules, this market will provide many opportunities before these same rattled investors find out.
 

So, today, I bought a few shares of McDonalds (NYSE: MCD) with nice and sweet dividend yield of 2.56%.

But maybe I was too fast as the market offered yet another great opportunity – Walmart (NYSE: WMT).

 
WMT
 

It is stunning seeing people focusing on the next few months or maybe a year and completely forgetting the long picture. Walmart just mentioned slowing e-commerce and missed one quarter and they are freaking out. The company was founded in 1945 and thrived since then. That is 73 years long story! It is a dividend aristocrat which paid and increased dividends for more than 50 consecutive years! And all those so-called “investors” out there suddenly think it will be over? End? They may be rattled over slower growth but as long as WMT keeps paying and increasing the dividend, all this is all nonsense and to me a great opportunity to buy more shares.

There is yet another perspective – online business competing with Amazon (Nasdaq: AMZN). At first, I thought Amazon has an unprecedented edge of an innovative and industry disruptive approach and business drive. I thought that Amazon will have no competition at all and that it is a huge threat to all bricks and stone retailers. Walmart proved me wrong again.

 

 · Trading of the day

 

Today, I opened a few new trades using AMZN and S&P500 (SPX) index. Below is a summary of all opening and closing trades:
 

Trading02-20-18
 

Our total day trading balance was + $216.00 dollars.
 
 






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Posted by Martin February 19, 2018
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Important Differences for Traders. SPX vs. SPY


Traders keep asking me what is better to trade – SPX or SPY. I do not see much difference between the two. To trade SPY and achieve the same amount of credit at the same strikes as with SPX just sell 10 contracts of SPY and you get the same results.

I personally prefer SPX but you may like SPY to trade your options.
 

Here are some differences between the two:
 

SPY pays a dividend and SPX does not. Ex-dividend day is usually the 3rd Friday of Mar, Jun, Sep, Dec, and that corresponds with expiration day. It is important to be alert when trading in-the-money calls because most such calls are exercised for the dividend on expiration Friday. If you own such options, you cannot afford to lose the dividend and must know how to decide whether or not to exercise. SPX pays no dividend.

SPY options are American style and may be exercised at any time (after the trader buys them) before they expire. SPX options are and can be exercised only at expiration.

Currently SPX options most often expire on Mondays, Wednesdays and Fridays each week. SPY weekly options only expire on Wednesdays and Fridays. So for those wanting to trade no more than 1 day before expiration, the SPX offers the most trading opportunities

SPY options are settled in shares. SPX options are settled in cash (the ITM value of the option is transferred from the option seller’s account to that of the option owner.

One SPX option (same strike price and expiry) is worth approximately 10 x the value of one SPY option. This is very important. SPX trades near $1,200 and SPY trades near $120. Thus, one at-the SPX money call option is an option to buy $120,000 worth of underlying. One SPY option gives its owner the right to buy $12,000 worth of ETF shares. If you trade a lot of options at one time, it may pay to trade 5 SPX options rather than 50 SPY options. That plan saves significant dollars in commissions, but it does mean trading European options and trading an underlying with no dividend. That will not be suitable for every trader.

Currently the IRS treats SPX index options differently than SPY options. SPX options get special section 1256 treatment, which allows investors to have 60% of the profits made in trading treated at a long term tax rate. So for many the SPX options can offer a tax advantage.






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Posted by Martin February 19, 2018
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The amount of ignorance is saddening


Today, the stock market was closed for observance of the President Day. Boy, I wish I could have those holidays and be at home doing nothing the same as bankers, government, and schools. But I still have to work as my trading account is not yet providing enough income to live off of it.

Warren Buffett Besides work, I try to do what Warren Buffett did and still does – read. So I read books about history, investing, trading, and trading psychology. And the trading psychology books are really revealing. It shows you how ignorant I was when I approached the markets in the first time.

The books on market predictions and analysis show how futile it is to try predicting the markets and rely solely on ones analysis. And it is also saddening how many people approach and invest their own money having little knowledge about the markets. They are just simply gambling.

Many times I told myself that if I was (and maybe still am) this ignorant and oblivious, I am then shocked. A complete lack of basic principles of investing or trading, very little knowledge of market historical behavior, predicting, basing trades on predictions and biased analysis… it is all shocking and saddening at the same time.

But I guess, everyone must go through this path of realization how stupid one was before making money. I went through the same path. I too thought I knew everything and even believed I knew better than what the Mr. Market tried to tell me.

For whatever it is worth, and you may totally dismiss me, but take my advice – study the markets and psychology of trading/investing, define your plan and stick to it and never deviate, never break your rules because you may think at some point that “now I know everything (or better).” Learn from my own mistakes.
 

Tomorrow, the markets will resume trading after the extended weekend. As I posted many times before, I use 50% of my options trading profits to buy dividend growth stocks. And since February was a very successful month to me so far, I made more profits last week which now allows me to purchase more shares of depressed stocks.

The fist and second week, I could buy Coca Cola (NYSE: KO), Valero (NYSE: VLO), Realty Income (NYSE: O), and Berkshire Hathaway Inc. (NYSE: BRK-B).

Tomorrow, I will be adding another stock to my portfolio – McDonalds (NYSE: MCD). It wasn’t an easy decision. Many of the stocks in my watch list were in a “correction mode” and I wish I could buy them all. But I do not have enough money to do so. Therefore, at this moment, I had to prioritize. And my biggest dilemma was to decide between JNJ and MCD. I decided to add MCD and hope JNJ stays down longer so I will be able to add it later in February or next month.

Although I am a bit skeptical that I will get another opportunity (but I may) as I see the stocks recovering really fast from the recent correction. But we will see. I might get another chance to buy more shares.
 
 






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Posted by Martin February 18, 2018
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A Good Food for Thinking – Personal Finance


I always keep looking for way how to make more money – create a passive income stream. I am lazy and passive income is good because you do not have to move a finger and still get paid.

The video below is interesting in one way – it made me thinking on how to help myself in creating another stream of income. In the past I was vastly unsuccessful. And when watching the video below I realized that as a visual person, visualizing my streams of income could help me to be more creative.

 

 

So, now I have some ammunition to work on…
 
 






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Posted by Martin February 17, 2018
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Trading options process


In order to trade successfully and stay in your comfort zone, I believe you need to know exactly what to do in any situation of your trade outcome.

No analysis, no oscillator, no market prediction will tell you what the market would do next. It is impossible and if anyone tries to sell you a miraculous winning strategy secret, he is lying. If any such secret exists, the one selling it to you would use it for himself and get awfully rich.

Trading is 90% about psychology and the rest is skills and knowing what to do. In order to trade successfully and have consistent returns, you must do the following:

 
1) Have a trading plan and strategy. Always know what to do in any situation.

2) Have enough money in your account so you can manage your trades when they need adjustment. The worst case what can happen to you is to be forced closing your trade at a loss due to a margin call.

3) Never predict the market. Always trade what you see is happening and not what you think will happen because it may not happen at all.

4) Trade only a handful of trades you have time to handle and manage. If you still work a full time job, opening 1000 different trades will knock you out in a sharp sell off. You will not be able to manage them when needed.
 

I am a visual person. It helps to have the process visible. Here is what my strategy decision process looks like:
 

Strategy flow chart
(note, I took the IT classes about 10 years ago and no longer remember exactly how to create the flow charts properly. So some ways above may not be correct and I apologize for it.)
 

When trading options, you must be perfectly OK with anything what’s depicted above. If you are OK with any of the point shown above you will not be surprised, angry or anxious about it and you will trade comfortable. And when comfortable you will also become consistent.






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Posted by Martin February 16, 2018
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5 Best Investing Tips from Warren Buffett


 

 






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Weekly Results – Feb 16, 2018


Weekly Results
 

The market saw a nice recovery during last week. Many are still predicting and forecasting that this market will crash again. They are all idiots. Do not put your money on their bets. Study the market’s history and you will see that in the last 16 occurrences of 10% corrections since 1950 the market dipped back down only in one case. In 15 remaining cases the market reversed and never retested the lows of previous correction.

Of course, anything can happen and that because in the last 15 occurrences the market never retested the lows is not a guarantee that it will do the same this time. but odds are high that this seasonality will repeat and this market will continue higher as it did in the past.

As I said before the selloff however, provided a great opportunity to buy new shares of cheap stocks and run this rally up. This week we didn’t buy any new shares (but we will be buying next week).
 

In the last week we recovered majority of the paper losses from the previous correction and as the rolled trades keep becoming worthless our accounts are marching up in value again.

We also made nice additional income this week of $1,600 dollars in our IRA account. The trading account and other retirement accounts didn’t produce much income this week since we have small money in those accounts and we are currently fully invested. With small accounts, trading is a bit slower than with large accounts. But I have patience.






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Posted by Martin February 14, 2018
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What’s the next S&P 500 move?


Prediction If you study the markets and browse a bit into history and seasonality of the markets you can get some nice numbers about the market behavior.

That can provide with some foresight and clues of what the market may do next.

However, let me stress out again that in the markets “EVERYTHING CAN HAPPEN” no matter what YOUR expectation, analysis, or seasonality says! You must never rely on it and then be disappointed when your expectation doesn’t materialize!

So, if I say today that I expect the market to create new all time highs in the next two months it still is not a prediction and I am aware that it may not happen at all.

If you place your trade with a set up based on this “prediction” or you are in a bad trade and hope that this “prediction” will finally help you out you are wrong and you shouldn’t be trading.

Looking for confirmations of a trader’s bias is one of the biggest psychological mistakes a trader can make when trading. If you are in a bad trade and the only way how to get out is when the market makes a new all time high then you would probably love this post as it will give you hope. But it will also give you a false hope, false self relief, and false peace of mind.

And you will also hate this post and the entire blog the moment this “prediction” doesn’t come true.

Do not set your minds set on a false expectations. Use those “predictions” and expectations as guidance and not confirmation of “what you want to hear”. Just go to Stocktwits web site and you will find majority of traders hopelessly searching for posts which confirm their outlook on a stock position and they are so blindfolded that they ignore signals from Mr. Market.

 

 · So, what is my next move expectation?

 

Warren Buffett
 

As I mentioned it above, I expect S&P500 to make new all time highs in the next 2 months. Why?

Let’s look at the history a bit. Lately, the market went through a small correction of 11%. The question is what happens next and history can provide a window to see. We want to look for how long it took the market to recover from 10% corrections in the past. Here are some numbers:

 

10% correction Days to recover
June 12, 1950 48
June 12, 1950 48
January 5, 1953 121
September 23, 1955 23
August 3, 1959 64
May 13, 1965 60
September 25, 1967 51
October 10, 1983 124
August 27, 1986 46
January 3, 1990 82
May 23, 1996 42
February 19, 1997 33
October 7, 1997 26
July 19, 1999 21
January 3, 2000 16
July 16, 2007 35
April 12, 2012 55

 

There are a few patterns visible:

1) Corrections are faster and steeper then before.
2) Recoveries take shorter time than before.
3) Average recovery time is 1 to 3 months.

 

With the average recovery 1 – 3 months and shorter times than in history it seems that a claim of a full recovery and new ATH in 2 months is a doable event.

But again, remember, everything can happen, even a situation that the recovery will take longer or not at all.
 






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