Posted by Martin June 10, 2024
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Repositioning our portfolio

I spent the first half of 2024 repositioning our portfolio to align with our goals. I took some trades off, some are “parked to a later day” when I will deal with them (for example, I converted some of the bad SPX trades into a “box” and now I keep rolling it away). When I build enough cushion I will get rid of them. But as of now, what are the goals?

The First Goal of Repositioning Our Portfolio – Strategic Allocation

Earlier this year, I decided to invest 60% of the portfolio net-liq into more adaptive (Strategic) investments to grow the portfolio faster and minimize drawdowns. I am still in the phase of re-allocating and building this part of the portfolio.

What repositioning our portfolio to Adaptive (Strategic) allocation means?

I started working on a model that tracks several metrics such as volatility, technical indicators, and some other data and I created two scales or rating systems. Our newsletter or challenge account subscribers receive emails with those metrics. But based on those ratings, I strategically move investments from aggressive to defensive positions. Though, I am still tuning the model, it is getting interesting results and most importantly a speedy warning to get out before a real trouble hits the market.

The Second Goal of Repositioning Our Portfolio – Futures Trading

I must admit – I discovered futures and I fell in love with them. I trade options and single contracts. This is my income generating vehicle. Above, I mentioned that 60% of our portfolio will be in Adaptive, strategic allocation. The remaining 40% will be allocated in futures trading and dividend stocks. Though I will be trading equities too, but not as primary income generating trades. The only issue with trading single futures contracts is capital requirements. It is really expensive (requiring a significant buying power) to trade futures. But it is way cheaper (in terms of buying power) to trade options against futures compared to SPX. So, futures it is. But I am building up enough reserves to overcome SPAN margin craziness.

The Second Goal of Repositioning Our Portfolio – Dividend Growth Investing

Of course, this is the core of our portfolio. This is a true passive income portion (20% of our net-liq will be allocated in this part). My problem was that I never had enough income to invest regularly significant amount of money to buy dividend stocks (and I am too old to start FIRE). My only alternative was to create an income stream that can be invested into the dividend stocks. That’s why I started the options and futures journey. And yes, it took me 10 years to learn the ropes (along with blowing up two or three accounts) and now, I finally, might be trading successfully. I am still a bit nervous about this claim, but I survived two bear markets… actually three, while trading options. And in 2020 I increased my dividend holdings by 34%. Not bad. No it is time to consolidate.

Another reason for this portion of the portfolio is, that both – the strategic portfolio and options/futures trading are management intensive strategies. No one can do it without learning what I have learned. And it takes time. As I said above, I am old and one day I will not be able to trade – you know dementia, or any other mental disease may kick in, and I will be forced to stop trading. I hope, dividends will be strong enough to take over my (and my family) income needs.

Portfolio benchmarks

I try to be honest with my trading and investing and post everything – good trades (I am proud of and bragging about), and bad trades (I feel terrible about but post them too). And I also wanted to start tracking my portfolio and comparing to other sectors and instruments to see, how my new strategy, mainly the adaptive, strategic investments work and protect my portfolio. So I started tracking a few investment vehicles, normalized their prices and now comparing it with my portfolio (blue line is our portfolio, the red line is the index or other vehicle):

Against commodities, our portfolio performs well and beats commodity sector. Why commodities? In bear markets, commodities do relatively well (in 2022 they outperformed everything out there)

Against emerging markets, our portfolio performs well and beats the emerging markets.

Against Gold, our portfolio performs well and beats Gold. Until recently, gold was doing better than our portfolio. Gold is another safe haven investors like to flee to, so I want to see how our portfolio does when everyone is panicking.

Against Realty Estate market, our portfolio performs well and beats the Realty Estate market. During downturns, IYR seemed to have lower drawdowns than the market, so I want to see how our portfolio does compared to this market.

Against 2x leverage Nasdaq, our portfolio lacks and underperform this instrument. During bullish mania, this investment boosts growth, but during selloffs, it crashes badly. Let’s see how strategic portion of our portfolio protects us from severe downturns.

Against Nasdaq index, our portfolio outperforms the index. During bullish mania, this investment boosts growth, but during selloffs, it crashes badly. Let’s see how strategic portion of our portfolio protects us from severe downturns.

This is one of the volatility metrics I monitor, so I am interested in seeing how our portfolio performs against CBOE short volatility index. So far, the index does better.

SPX doesn’t need any introduction. So far, we beat the index, but I want to see how we do when there is a selloff. So far, our portfolio seems to be more volatile than the index (thanks to the futures SPAN margin requirements), but when I fully build up our Adaptive, Strategic portfolio, I want to see how that impacts our portfolio volatility.

In 2022 bear market, TLT failed to protect investors. In fact, bonds fell harder than equities. It is something I have not seen before. Yet, investors use TLT as safe haven, so I am interested how our portfolio will do over a long period of time.

I think, comparing our portfolio full of equities and futures with dollar is a bit off, but dollar can move the markets. And if it does move the markets, I want to see how our portfolio does.

VBINX is a broader Index fund, broader than SPX, so I added it too.

VXZ is another volatility metric I track. When people panic, this baby goes up. It shoots up. I want to see if our portfolio shoots up with it.

We are beating energy sector.

Utilities are another defensive sector investors like to use when they panic. I want to use it to see how our portfolio does when they panic.

I started tracking these vehicles and our portfolio recently. I do not want to spend time filling out old data, so I will be updating these chart moving forward only. I hope, I will be able to see a better picture about our strategies and how they work in real life.

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Posted by Martin June 02, 2024
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Is the weakness in the stock market over?

I had a bullish trade when I bought futures contract late in April 2024 and then I was trailing my stop higher. I thought this could continue longer but then I was stopped out. I was thinking: did I place my stop loss (in fact it was a stop gain loss) order too close the market and I was stopped prematurely? A few days later the stock market started selling more and it showed up that it was a good move. I was stopped out right before more selling happened, while I was waiting for a new breakout that has never arrived.

The price crashed on a very high volume (investors were freaking out about inflation, yields, FED and so on, old story). Despite the recovery attempt the next day, it failed and the market continued lower and eventually fired a short selling (breakdown) signal.

We sold the futures short and set up a new stop loss order. The stop loss was selected at about 0.50% above the market risking $1,537.50 if the trade turned against us. The Friday’s initial trading proved that we were on the right side of the market. Not even in a day, we were making $1,700.00 of unrealized profit. I was excited about it. But then the market reversed and started rallying higher.

Maybe, this rally will turn out to be fake and next week we will resume selling but on Friday, it was not clear. And it still is not clear. Tomorrow, we still may rally higher and create new highs (and fire a buy signal). I do not know it. No one knows. The only indication that is telling me that this bullish trend may continue is that the price action printed a very large green candle on a very high volume while volatility crashed more than 10%. I wrote about it in today’s weekly newsletter why the market may very likely continue higher next week.

This was all happening very fast and when I started seeing profits disappearing, I closed the position. It turned out to be the right move. If I waited longer, the trade would have turned into a loss (the stop loss would have hit). By reacting fast, I preserved a small gain:

This appears to be a beauty of Futures. Thanks to leverage, this small price difference of only 4.25 points (5,244.25 – 5,240 = 4.25 point) delivered a relatively nice profit of $212.50 (4.25 * 50 = 212.50).

However, the price action happened so fast that this posed another issue I am trying to solve. I published this trade to my subscribers so they can copy-trade it if they choose to. But when the market started moving up fast, I issued a closing order alert but the subscribers may have not received it on time to get our at the same price as I did. They may have even close the trade for a loss.

So, I am thinking about what ways and options I have to post alerts faster. Not easy task. Emails take time to compile, I tried Twitter but it didn’t seem to work well either. So, if you are a subscriber, or even a reader of my blog and have an idea how to post our trade alerts fast, please, let me know if the comments. I am genuinely interested in helping my followers in the meaningful way and deliver my service fast enough to react.

So, right now, I am out of the trade and again waiting for a new entry signal. If the futures breakout above the resistance or breakdown below the support again, I will be re-entering the trade and placing my stop loss order below the entry point. This time, I will also send a notification to my subscribers.

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Posted by Martin May 27, 2024
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Futures trading – Waiting for a breakout

At the end or April, I entered into futures trading. Not just trading options against futures but also buying and selling futures contracts. It turned out to be a very profitable trade and I plan on trading it again. The only issue with this type of trading is that it is very capital intensive. Unlike other trading vehicles, futures need $12,960.00 fixed buying power. Selling options only need $1000 (depending on the trade setup). But futures can be very profitable thanks to the leverage.

I used trailing stop to protect my profits since this market is very volatile. Despite volatility crashing, there can be wild swings (thanks to the FED and spooky investors who freak about it all the time without thinking – freak now, think later.

So, I got stopped out and banked a good $10,250.00 profit.

I am happy about it and now I have a huge urge to brag about it. That’s why I am posting my result, but also show what I plan on doing next. And my next move is to wait for a new breakout to buy back in and ride the sucker up again (or get stopped if it doesn’t work).

When the futures break up above the resistance, I will be re-entering the trade and placing my stop loss order below the entry point. This time, I will also send a notification to my subscribers.

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Posted by Martin May 26, 2024
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Understanding Dividends

Dividends can be a contentious topic in the investment world, with varying opinions on their impact and value. Let’s break down the main perspectives and clarify the mechanics behind dividends. Dividends are payments made by a corporation to its shareholders, usually in the form of cash or additional shares. They are typically paid out of the company’s earnings. However, there are investors who claim that dividends are a zero sum game and that you get nothing because it is paid from the stock price. So, how is it?

Source of Dividends

Dividends are paid from a company’s profits or earnings. When a company generates profit, it can choose to reinvest in the business, pay down debt, buy back shares, or distribute a portion of the profits to shareholders as dividends.
The decision to pay dividends is made by the company’s board of directors.

Impact on Stock Price

When a company pays a dividend, the stock price typically decreases by the dividend amount on the ex-dividend date. This adjustment reflects the fact that the company has reduced its cash reserves by paying out the dividend.

For example, if a stock is trading at $100 and a $2 dividend is paid, the stock price might drop to $98 on the ex-dividend date.

Dividend Investing Perspective

Proponents: Supporters of dividend investing argue that dividends provide a reliable source of income, especially for retirees or those seeking steady cash flow. Dividends can also indicate a company’s financial health and commitment to returning value to shareholders.

Critics: Critics suggest that dividends are essentially a return of capital, arguing that investors might be better off if companies reinvested the earnings to fuel growth. They see the drop in stock price as evidence that dividends do not add net value to shareholders.

Dividend Investing – A Zero-Sum Game?

The argument that dividend investing is a zero-sum game stems from the belief that dividends merely redistribute existing value rather than creating new value. Here’s a closer look at both sides of the argument:

The Zero-Sum Game Argument

Dividends and Stock Price Adjustment: Since the stock price typically drops by the dividend amount, some argue that dividends do not provide additional value. They view it as simply shifting money from the company’s balance sheet to the shareholder’s pocket, resulting in no net gain.

Tax Implications: Dividends are often taxed, which can reduce the overall return for investors compared to capital gains, which might be taxed at a lower rate or deferred until the stock is sold.

The Value Creation Argument

Income Generation: Dividends provide a steady income stream, which can be especially valuable in low-interest-rate environments or for investors seeking predictable cash flows.

Reinvestment Opportunities: Dividend reinvestment plans (DRIPs) allow investors to purchase additional shares with their dividends, potentially compounding returns over time.

Signal of Financial Health: Regular, sustainable dividends can signal a company’s confidence in its future earnings and financial stability, potentially attracting more investors and supporting the stock price.

Conclusion

Whether dividends are viewed as valuable or a zero-sum game depends largely on individual investment goals and perspectives. Here are some key takeaways:

Income vs. Growth: Dividend investing can be highly beneficial for those seeking income and stability. For growth-focused investors, reinvestment of earnings might be more appealing.
Company’s Health: Dividends can indicate a healthy, profitable company. However, investors should also consider the company’s overall strategy and growth prospects.

Tax Considerations: The tax treatment of dividends versus capital gains can influence their attractiveness depending on the investor’s tax situation.

In summary, dividends can be an important part of an investment strategy, providing income and potentially signaling company health. However, whether they add net value depends on the investor’s perspective, goals, and tax considerations.

What do you think? Is dividend investing a zero sum game when you get nothing because the dividend is taken from the stock price, or is it a value created by the compoany and paid to the investors? Let me know what you think in the comments.

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Posted by Martin May 26, 2024
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Contest #26: Guess the S&P 500 Friday Close And Win Cash!

Last week, we didn’t have enough votes to have a valid contest. We need at least five people to vote according to rules below to make the contest a valid one. Please vote in the comments below and win cash!

Contest voting is from Sunday May 26th – Wednesday May 29th and it is now OPEN

Welcome to the Guess the S&P 500 Friday Close Challenge!

We’re thrilled to bring you an exciting contest where your forecasting skills could win you a fantastic prize – a $100 Amazon or Cash gift card! Get ready to flex your market intuition and join the fun.

We all want to hear your opinion on the article above:
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Posted by Martin May 19, 2024
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Contest #25: Guess the S&P 500 Friday Close And Win Cash!

Contest voting is from Sunday May 19th – Wednesday May 22nd and it is now CLOSED

Welcome to the Guess the S&P 500 Friday Close Challenge!

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Posted by Martin May 15, 2024
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Why I Switched to Trading Futures and Futures Options

I run a program for subscribers to present my trades and post trade alerts. Anytime I open a trade, close it, or adjust it, I send out an alert so subscribers can copy trade my trades. Any subscriber can also ask any questions and if they need help I can help them with trades, explain the mechanics of a trade or help them out if any trade goes against them. I traded SPX for years but lately started shifting to trading Futures and Futures Options. Here is why.

When Trading Futures and Futures options, PDT doesn’t apply

I do not day trade but time to time when the markets got volatile, I was forced to adjust an SPX trade a few times in the same day. I trade multiple accounts, some are large enough where day trading wasn’t an issue, but others were small (below $25,000) and that caused those accounts being flagged as “Pattern Day Trader” (PDT). In those accounts, I couldn’t trade freely and I had to be very careful with the trades. Many adjustments couldn’t be done at all, I had to let the trade expire in the money and incur losses.

Trading Futures and Futures options requires less Buying Power

This is the biggest advantage I am seeing so far – futures are cheaper to trade. Not on the fees basis, they are more expensive compared to SPX, but on the margin requirements basis. I can open an option trade and limit the margin requirements to $1,000 while collecting significantly higher credit. I can even sell a single naked put contract which would require $8,000 – $12,000 buying power and collect $3,000 – $5,000 credit. Do the same with SPX and you will need $94,000 Buying Power. Compare the requirements for SPX vs. Futures options below:

And here is a same trade (same delta and expiration) for futures put contract:

As you can see, I can collect about the same credit for the same expiration day, same delta, but with significantly lower BP reduction. This is a big deal. Not because I can recklessly trade more contracts, but because I will have more cash and buying power left to weather volatility and day-to-day market fluctuations. The worst thing in trading options is not to have enough cash when there is a storm or panic out there and you are forced to close a trade for a loss due to a margin call. It happened to me many times that the markets changed, margin maintenance requirements increased and I had to close a trade safely far away from the market so survive the storm for a loss just to release the buying power.

Trading Futures options are safer

If you compare the pictures above, you may notice one more benefit of options against Futures vs. SPX that makes futures safer. The same delta is farther away from the money compared to SPX. The dashed line on both trade tickets represent 1SD (1st Standard Deviation). The SPX is at the 1SD, the futures put option is three strikes lower than that. If we assume that the markets can fluctuate and fall down to 1SD, futures contract can still survive the wave of panic selling. The SPX will be already in the money. Of course, this is not something to bet on every single trade, but it provides better safety down the road.

Trading Futures contracts also require less capital

If you do not want to trade Futures options, you can trade contracts directly. While we can buy a futures contract, we cannot buy SPX. If you want to buy SPX you have to use an ETF that tracks SPX such as SPY. In my opinion, SPX and SPY are less efficient as far as capital requirements. If you decide to day trade futures, you would need $6,000 buying power (not an exact number, but in the vicinity of it). If you hold a Futures contract overnight, the BP will increase to $12,890 (again in the vicinity of it). You will never be able to achieve this with SPY. Try to invest the same amount of SPY shares to gain the same rewards as with Futures and you will need significantly larger capital to open such trade.

Trading Futures contracts are more profitable

Given what I said above about Futures being more efficient, they provide far better return on invested capital. I opened a Futures contract in April 30th. I bought 1 /ESM4 Futures contract at 5,080 per contract (with $12,890 +/- buying power reduction). Today (May 15th, 2024), that contract is worth $12,800.00 of unrealized profit:

I wouldn’t be able to achieve this holding SPY with only $12,000 buying power. I would need a lot more capital to do it.

Here is the same trade on a chart (with a trailing stop to protect gains should the market reverse and sell off):

What’s not so good with trading Futures options?

The only thing in my evolution of Futures trading and trading options against Futures contracts is difficulty to adjust complex options strategies. For example, rolling a simply vertical put spread (or call spread) is impossible to do as a single trade. At least Tasty Trade says, they do not support such trade (and I am not sure if this is the same with other brokers or just Tasty). Adjusting a trade, like rolling to further date, needs to be done by legging in and out. That can be sometimes very frustrating.

Another bad thing (ugly) is the fees. Fees when trading options against Futures, are very high, so trading short expiration (like 0 DTE) trades and use delta 10, for example, is impossible to do. The trade will not be profitable. The trade will open for a debit (as a seller, I want a credit).

Other than that, I like the performance of using options against Futures or buying/selling Futures contracts directly, so far.

Do you want to trade Futures with us?

If you want to receive our trade alerts to your email inbox, subscribe to our SPX Alerts (although they are no longer SPX alerts), or if you want me to help you trading your account, shoot me an email. I will be happy to assist you.

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Posted by Martin May 13, 2024
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Added an Economic Calendar to Avoid the FED

This and next week we will be overwhelmed by a ton of economic news such as inflation data, CPI, manufacturing data, employment news, and so on. On top of that we will have J. Powell and other FED officials telling us what we already know and typically, the market will act erratic and investors will be crazy again.

Two weeks ago (or three?) I ignored this frenzy and opened new trades on Monday just to sweat my crack watching those trades killing my margin requirements when the market went up (great, I was making money), just to follow by a sharp turn down within the same hour (and I started shitting bricks glued to the monitor).

Fortunately, the trades were safe and expired worthless for the full profit. But it was close. I promised myself not to make the same mistake again and wait for this craziness to settle before opening the trades.

The problem is that these waves of economic news that can shake the markets are coming often. It feels like they are published every week (or day). There will always be something to worry about and people will always freak about everything and anything.

But I want to wait after the news to open new trades. The news we will get tomorrow and on Wednesday should set the trend for the next few days and the next week. So, after the news we should have a good idea where the markets may be headed.

It is difficult to predict where the inflation will be, everyone I follow expects the inflation to settle (Tom Lee or Wolters Kluwer), and if so, expect the markets to skyrocket. But in the meantime, it can be shaky.

And for this I added a calendar to my blog to quickly assess when these events may happen to avoid trading during those moments, especially when we had a futures options trade expired today and I plan on renewing the trade. Three weeks ago I would reopen the trade today and then pray for the market gods to keep me safe. Today, I would rather wait for the storm to pass.

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Posted by Martin May 12, 2024
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Contest #24: Guess the S&P 500 Friday Close And Win Cash!

Contest voting is from Sunday May 12th – Wednesday May 15th and it is now CLOSED

Welcome to the Guess the S&P 500 Friday Close Challenge!

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Posted by Martin May 07, 2024
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Will market sentiment lead to the new highs?

Read more here…

Do you want to learn more about our market sentiment score system? We try to evaluate market trend, sentiment, and volatility to determine whether to stay in cash, ride the trend or be aggressively buying. Prevent your portfolio experiencing large drawdowns and subscribe to our newsletter to find out what is the safest way to trade next week and every week.

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The First Goal of Repositioning Our Portfolio – Strategic Allocation

What repositioning our portfolio to Adaptive (Strategic) allocation means?

The Second Goal of Repositioning Our Portfolio – Futures Trading

The Second Goal of Repositioning Our Portfolio – Dividend Growth Investing

Portfolio benchmarks

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Source of Dividends

Impact on Stock Price

Dividend Investing Perspective

Dividend Investing – A Zero-Sum Game?

The Zero-Sum Game Argument

The Value Creation Argument

Conclusion

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Contest voting is from Sunday May 26th – Wednesday May 29th and it is now OPEN

Welcome to the Guess the S&P 500 Friday Close Challenge!

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Contest voting is from Sunday May 19th – Wednesday May 22nd and it is now CLOSED

Welcome to the Guess the S&P 500 Friday Close Challenge!

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When Trading Futures and Futures options, PDT doesn’t apply

Trading Futures and Futures options requires less Buying Power

Trading Futures options are safer

Trading Futures contracts also require less capital

Trading Futures contracts are more profitable

What’s not so good with trading Futures options?

Do you want to trade Futures with us?

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Contest voting is from Sunday May 12th – Wednesday May 15th and it is now CLOSED

Welcome to the Guess the S&P 500 Friday Close Challenge!

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