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Saturday, May 5, 2012

Weekend Portfolio Analysis (05-05-2012)

Ok, so back in Canadian soil this week, and with my first trade after over a month of inactivity. The S&P500 lost 2.6% this week and Thursday and Friday saw the formation of two solid red candles, specially Friday.

I entered the SPY 131/129 Bull Put spread around noon, and it was a mistake. I got "finger happy" and pulled the trigger too soon. Maybe because of the desires to be back in war. But in reality this trade didn't meet all my parameters. Yet, I entered it, I don't know why.

The markets were not oversold at that point. RSI was not below, not even around 30, Stochastics were not oversold, not even around 20, and the number of stocks below their 20 simple moving average was around 45%, clearly far from oversold. I usually like to see only 20 - 25% of stocks above their 20SMA, which to me signals a more oversold market that is coming to an end.

(Click on image to enlarge)
Anyways, the 130.70 value of SPY, which is my breakeven, seems far. And some support might be found around 136 and 134 on the way down.

If the market keeps going down, I will open another Bull Put Spread, but using another index. Right now I am liking IWM, 72/70 strikes. Those strikes are far enough and beta-weighted vs the SPY, they are the equivalent of SPY going down to about 127. That's the reason why I didn't open another bull put spread on Friday, because it would represent a double accumulation of risk in the same direction and approximately the same market neighborhood in spite of using two different indexes. Let's say I had opened a Bull Put Spread on IWM on Friday, strikes 75/73, then what happens is, if the markets keep selling off, both positions, SPY and IWM will be in trouble at the same time, as SPY going down to 131-132, implies that IWM is probably close to 75-76. So, both trades would be in trouble, close to their breakeven points at the same time.

By waiting for a continued sell off, and letting a few days go by, I am diversifying over time instead.  And opening a 72/70 position on IWM if the markets keep going down is a healthy proposition for the portfolio.

Now, if markets go up a bit, I will probably close this SPY 131/129 position as I realize it was open by mistake.

Be well, and stay profitable!

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