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Saturday, January 21, 2012

Weekend Thoughts (01-21-2012)

Well, well, well, the markets just don't want to go down. This is so similar to late 2010 - early 2011 when no matter what you threw at it, it would shake it all off, and would keep moving up. The funny thing is, the more it moves up, the more people are convinced and turn bull. Former bears recognize being wrong, change their mood and jump on the bullish bandwagon, when in fact the higher the chances of a top being close. Once the number of bulls becomes extreme, the markets pull back. But before analyzing current conditions, I want to give myself a pat on the shoulder for the successful January expiration cycle...

Both trades that remained open expired worthless for full profit.
The QQQ Bear Call Spread for a profit of 17.64% and the IWM Bull Put Spread for a profit of 16.28%. Overall, excellent month with 3 winners, zero losers and a 7.77% growth on the overall portfolio before commissions.

Moving on to the February expiration cycle two trades are open:
An SPY Bear Call Spread and a RUT Bear Put Spread. Both are betting on some sort of retracement. The SPY Credit Spread was opened last week, when I thought the markets were due for a pullback, they didn't go down, so that trade is losing a bit now, and I will probably close it before it all gets complicated. The RUT Spread will probably be closed soon as well.

In order to have an idea how far a stubborn market like this can go, I went to the charts from December 2010 to February 2011, to analyze a similar reaction this same time last year. Back then this is what happened with the SPX index:

(Click on image to enlarge)

From expiration to expiration:
11/22/2010 to 12/17/2010: SPX from 1198.07 to 1243.91 (+45.84 points)
11/20/2010 to 01/21/2011: SPX from 1245.76 to 1283.35 (+37.59 points)
01/24/2011 to 02/18/2011: SPX from 1283.29 to 1343.01 (+59.72 points)

So, essentially the market stayed in full bull mode for 3 months. And in the case of the January to February expiration cycle it rallied 60 SPX points. If that were to happen this time, my SPY position would be in danger as my break even point at 135.35 is approximately 1353 on the SPX, which is forty something points away from current level. Still far, but possible. Even if the position is hurt, it wont be from one day to the other but a slow process with sometime to think about closing or adjusting further up. So, overall I'm not overly concerned, at least by now.

Let's see what happened with RUT during the same period;

(Click on image to enlarge)

11/22/2010 to 12/17/2010: RUT from 722.34 to 777.08 (+54.74 points)
11/20/2010 to 01/21/2011: RUT from 779.51 to 773.18 (-6.33 points)
01/24/2011 to 02/18/2011: RUT from 773.71 to 834.82 (+61.11 points)

With my RUT breakeven around 830, I'm currently around 45 points away, which is achievable by a market like this, judging by last year's activity. Again, I'm not overly concerned right now, but I have to be cautious.

Low probability of new positions being open this week. And medium to high probability of closing one of the two Spreads if the markets pull back a little.

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