Posted by Martin February 27, 2018
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Powell tanked the market but on a very low volume


Powell testified in front of the Congress and tanked the market. But did he?

Maybe he sparked this selling but it was expected. We recovered most of the correction in a fast pace. This recent correction was fast and in one wave and we recovered in the same fast pace… and in one wave.

However, the selling happened in a very light volume:

 
SP500
 

A low volume pullback is a technical correction toward an area of support that occurs on lower-than-average volume. Since the move occurs on low volume, traders often attribute the pullback to weak longs locking in profits rather than a reversal. (Investopedia.com)

If this definition is correct and we are really in a “technical pullback” then this is a profit taking event, healthy for the market, and the uptrend should resume (and since I have a few bullish trades I wish it is what will be happening in the next few days).

Yesterday, I posted “We may see a small pullback to 50 DMA but we most likely continue higher as per my previous estimate…” and it seems that this is exactly what has happened today. In fact, I think it is something what was supposed to happen despite Powell’s testimony.

However, this selling derailed me and I made a few trades out of discomfort. Yes, I collected more premiums but, as I stated, I wasn’t much happy with those trades.

I had to close my trading platform to not get sucked in more trading.

 

 · Trading activity today

 

Although, we collected nice premiums trading today, I am not much happy with it. The trades were driven by emotions and not by calm trading. Followers of our trading and this blog may remember that I strive to trade without emotions and without panicking. I strive to control myself and always be in a “comfort zone”.
 

I must admit, I failed today.
 

Here is a summary of opening and closing trades.
(balance + $435.00)
 

SP500
SP500
 

Let’s see what next few days bring. I assume we may see some downward pressure to continue but more buyers will for sure step in and continue buying. The odds of larger pullback though are very low.
 




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Posted by Martin February 27, 2018
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Powell speaks, market craps


Although he said nothing spectacular, nothing everybody already knew (except maybe that everybody expected three interest hikes while he mentioned four) and market went on a selling frenzy again.

At some point this freaked me out a bit as my recently rolled SPX calls into puts got into trouble and I rolled them back into calls. But then I realized that it was all over-reaction. There still is absolutely no catalyst for a bear market out there. So I rolled it back into puts.

I increased risk a bit doing so, but now decided to sit still and do nothing until this crappy market moves calm down.

Today’s morning action and my trading reminded me of staying away from these market moves and reacting to them. It is difficult to do when your trade position is being attacked (in my case puts getting touched or in the money) but if the overall outlook is bullish, converting puts into calls is wrong just because the market is only freaking out.

So, I moved my trade back to what it was (happily collecting more credit) and now I need to sit tight and wait.

 

 · What investors missed – again?

 

First of all, the Wall Street reaction was based only on an assumptions of the same ones. Powell actually hasn’t said anything that he would increase the rates. He once again stressed data dependency and although we see economic prosperity and growth, according to Powell, it doesn’t pose an increased risk yet.

So his remarks can be seen positively and not negatively. The entire testimony pointed to lack of need to raise the rates! There was no urgency to do so. It was clear that FED would go forward and raise the rates only, if inflation starts moving in a faster and stronger pace. And that is not yet happening. Moreover, our inflation rate is still below historical average so any inflation growth will be returning to normal. Once the pendulum swings above the average we may see the need for FED to react.
 
 




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Posted by Martin February 26, 2018
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The market cleared 50 DMA today


Many stock operators recently claimed that we are in a bearish market which will turn lower and retest the February lows before it turns up higher. Others were spooked of inflation claiming that it is a game changer and that the stock market is heading towards the long waited bear market. Some called for the market to close below 200 DMA in order to call the correction to be over.
 

And all together forgot about the state of current economy.
 

I do not want to sound like I know everything or a newly discovered stock market guru. Not at all. I am learning myself. And I try to be reading about the market a lot. Mostly about its history, historical sentiments, behaviors and how the markets performed in the past during similar correction.

This still can be dangerous as I saw many people claiming that this market is too similar to 1932, 1962, 1987, 2002, 2008… and who knows what else. But is it?
 

Again, everyone who is making comparisons with previous bear markets are comparing apples and oranges. And I wonder, is it just me who feel like an idiot telling everyone that they are comparing incomparable?

How can anyone, a bit sane, be comparing today’s market with booming economy, earnings up 16%, sales up over 6% year-over-year, historically low inflation and unprecedentedly low interest rates with an economy of 1987 which was already stagnating, we had high inflation, high interest rates, slowing earnings (some companies even showed losses)? Was the economy of 1986 – 1987 the same as today? Of course, it wasn’t!
 

We will ultimately get to the same state when the economy stops growing and our rates will be high, inflation high, earnings mediocre, and consumer spending stops. But we are not there yet!

If we see troubles I would expect them in 2019 but not this year.

If you look at every 10% correction in the past and look at what the market did next, you will see that it always rallied after the correction (except one exception).

 
S&P500 - 2012
 

In 2012 the market corrected 9.99% and never re-tested the 200 DMA, it took 3 months to create new ATH, and another almost a year before the market suffered another 10% correction.

 
S&P500 - 2012
 

In 2007 the market corrected 10.25% and never re-tested 200 DMA. It took about 2 months for the market to create new ATH. In November 2007 the market stumbled and turned into worst crisis since 1929. The signs of economic problems were already painted all over the place and saying that today we have the same economic problems as at the end of 2007 is ridiculous.

 
S&P500 - 2012
 

In 1998 the market sustained 19% correction (so not exactly what we are seeing today). It created a double bottom before it rallied up to new all time highs.

 
S&P500 - 2012
 

In 1997 the market corrected by 9.34%. It didn’t even reached 200 DMA, reversed and recovered sharply, creating new highs in about 3 months.
 

There are more examples of the same pattern further down in history. I was just lazy to look the all up and post them but you can do this search for yourself. You will most likely see the same results no matter what was the state of the US economy. The market recovered and created new all time highs before it either suffered a new correction or bear market.

Thus my expectation is that we will see another 1 to 3 months of recovery (plus/minus). Then we will see. But taking into account the booming economy I have a reason to believe that we will see more than 1 to 3 months.

 

 · 50 DMA cleared

 

In my previous post I expressed my concerns that we may be in a short term bearish pattern since the market was below 50 DMA and it was not able to break up.

The market seemed to start creating a sideways pattern:

 
S&P500 - 2012
 

A previous day the market seemed to be in a descending triangle. As far as my limited and very poor knowledge of technical analysis goes I expected the market to break from the trianlge in the same direction as it entered into the triangle, which was up.

 
S&P500 - 2012
 

Today, we cleared both patterns:

 
S&P500 - 2012
 

And we also finished and closed above 50 DMA which clearly indicates that once spooked investors realized their spookiness and are again strong in buying into this market. The more investors who sold in panic down low will be coming back and buying back high.

 
S&P500 - 2012
 

We may see a small pullback to 50 DMA but we most likely continue higher as per my previous estimate based on a usual historical market behavior of 1 to 3 months recovery after 10% correction.

However, if you do your own research, market analysis, or chart studies like the ones above, you may come to different results. In fact, for every chart claiming one thing, someone else can come up with a hundred other charts saying otherwise.

In one of the Facebook groups a novice investor asked if it was feasible to set a goal and strategy to make 1% weekly revenue since he already studied all charts, back-tested all studies, and market. Really? Did he really studied all? ALL? And what makes one to believe and set a goal based on some, limited studies? I think it was not a feasible goal.

I am not saying that it is not possible to achieve such goal. It for sure is. But is it sustainable? In the long run? I don’t think so. It is not feasible to create a goal that from now on you will be making 1% per week because you have studied all indicators, charts, predictions, studies, or magical formulas.

Just by setting such a goal you put yourself mentally under large psychological pressure which will either push you to trade when you should not and making mistakes because back in your head you will feel like you have to trade.

In February, this month, I just made over 5% (5.60% so far) and the month is not over yet but should I plan for it as my “feasible goal”? Not at all. Should I use this number as my goal for next month? Not at all.

I focus on protecting my money and trades so when I trade I have to make sure that I have enough cash to manage the trade should it turn against me and I need to adjust, and that I know what to do when the trade turns against me, what steps I need to take. So my trading is to stay in a comfort zone and I do not care how much money I make in the process.

Yes, I publish it for others to see and learn, but not as that was my goal.

And of course, in the past, I may have been saying different things, I am still learning and developing myself. It would be actually bad if I was staying rigidly in a wrong strategy and mistake. That’s why my trading account looked like a bum-and-bust account. I made tons of money and later lost them, then I made tons of money again, and lost them again. Not interested in such results. I want consistent result. Framing myself in an unsustainable goal is not my way and hopefully never will be. And I do not care if others take it or reject it.

If there is only 1,000,000.00 market participants you will be able to get 1,000,000 different results of analysis, expectations, and predictions. And if you can provide so many different explanations to a single event, how do you know which one is the right? Yours?

 

 · Trading activity today

 

There is a market wisdom which says that if the Friday trading finishes up and strong, expect Monday market going higher. I followed S&P 500 futures and Asians markets to see what Monday morning trading would look like. And the market was set to open up.

So I opened a few bullish trades today. But the market lacked any move trading sideways. At some point it even looked like we may head lower. So I added a bearish trade. Expectations? Predictions? Analysis? All can be wrong and turn around at a dime. No even best and brilliant analysis in the entire world will not guarantee success.
 

And so, I had to roll my bearish trade.
 

Here is a summary of opening and closing trades.
(balance + $468.00)

 
Trades
 




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Posted by Martin February 24, 2018
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Overreacting spooked investors are realizing their spookiness


 


 




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Posted by Martin February 24, 2018
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Opening and closing trades in Friday


I was at the meeting almost entire day on Friday so I missed nice rally. But it is OK. In the stock market there is no day of missed opportunity (well, you can miss your opportunity if you decide to stay out and sell all your positions (close them) out of fear or panic and sit aside afraid of even looking at the market and going back to stocks only after all panic is all gone and stocks recovered all their losses creating new all time highs.

But that is not what I am referring to. Not to situation of spooked investors selling low and buying high. I am referring to everyday trading and investing. Then, if you are in the market all the time, have a plan, execute the plan diligently, then there is no missed opportunity. There will always be another one if one is missed.

Have I been in my office, I could trade a few SPX puts to extract more money from the market. But I wasn’t in the office so stayed aside.
 

However, in the morning before going to work I placed two new orders which executed later on.

A summary of opening and closing trades.
(balance + $82.00)

 
Trades of the day
 

Friday was a great day of a rally thanks to spooked (now) FED who stepped in calming the markets that they will not be hasty in raising the interest rates. From a technical analysis perspective and human/market behavior I can expect the market to rally again on Monday. If that materialize I might trade SPX that day. But I can’t say until I see what the market wants to do.
 
 




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Weekly Results – Feb 23, 2018


Weekly Results
 

Our IRA account is fully recovered by now. Unless something bad happens again, our monthly chart record will look like no correction ever happened.

This is what every investor and trader should do – never panic, never over react; have your plan, strategy in place and let others to panic and scream. You execute your plan with cold head.

February provided a great return so far. The crazy selling and later recovery allowed us to trade downtrend as well as the uptrend and make money both directions. So far, February was our best trading month making $5,110 dollars and we still have one week to go.

Part of our plan is to use 50% of options income to purchase dividend growth stocks (aristocrats) and grow our account two fold – with dividends and options.

Usually, we buy the stocks on monthly basis but this time we were buying weekly to take advantage of the sell off and buy cheap. We purchased shares in the last two weeks and we purchased dividend growth stocks this week too.
 

Last week we bought:
 

Bought 3 MCD @ 157.00
Bought 5 WMT @ 93.75
 




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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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