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Sunday, November 1, 2015

Weekend Portfolio Analysis (November 1, 2015)

I thought I wouldn't have time to write a weekend article but suddenly a window of opportunity has been revealed. Thanks by the way for leaving your vote on the Model Portfolio size dilemma. Like I said "the more the merrier", so if you haven't, help me make the content of this site better by leaving your vote here.

We had a remarkable October where the S&P500 returned 8.3%. Measured by the ES futures it was 8.66%. When designing your trading system you have to be very careful about over-obsessing with rallies like this one and designing permanent measures to prevent any type of loss. There's only so much you can protect and hedge everywhere until you totally destroy the possibility of having better than "bond-like" returns in the long run due to an extreme number of rules, adjustments and hedges. We simply lived an exceptional October. Do you want to know how frequently an October like this one has taken place?

Well here it goes. Since 1950 there have been only 4 instances of greater than 8.3% returns in October. Those were: 1974 (+16.30%), 1982 (+11.06%), 2002 (+8.64%), 2011 (+10.79%). So, on average this happens less than once per decade. 4 times in 65 years. Do you seriously want to permanently adopt measures to hedge your risk every month in such a way that you avoid losses in case of a month like this one? The cost of those permanent extra rules and measures would hinder the ability to obtain better than average returns in the long run. As an options seller, it was simply time to digest a loss with elegance. That's it.

Market Conditions
(Click on image to enlarge)
Stochastics: 92 (overbought)
McClellan: +17 (neutral)
Number of stocks above their 20 DMA: 54% (neutral)

Do you notice the pattern in these statistics lately? Well, only if you have been a reader since before the past two weekend analysis. The market has kept going up while these indicators have been consistently going down, especially the McClellan Oscillator and the Number of stocks above their 20 Day Moving Average. It's like an increasing number of participants (stocks) have been leaving the party earlier while the index keeps marching up propelled by fewer names that have a greater weighting in its composition.

My bias? Irrelevant. But if you still want to know, this is one of the few occasions where I actually have an opinion. I think chances favor the downside here. I know, I know we are about to enter the strongest period of the year (November - January). I'm just talking about a little one or two week weakness before the final orgy begins. Now, not because I'm bearish means I am going to throw the house attempting to short this market. Of course not. There are a bunch of positions already in place. Strictly looking at the indicators (2 neutral vs 1 overbought) this is no man's land here, where I favor Iron Condors rather than individual credit spreads.

Here's our other buddy. The Russell index. Like a good boy totally respecting the upper end of that downtrend line.
(Click on image to enlarge)

November positions
SPX 1630/1640/2130/2140 Unbalanced Iron Condor
Call side may need attention on rally to around 2105. That's my adjustment point, up from 2100 last week. Not really concerning because it is an unbalanced Iron Condor, so upside risk is pretty controlled at this point.

SPX 1945/1950 Credit Put spread
Decision point to adjust is around 2000 this week. Pretty good odds considering the index is trading at 2079. That'd be a 4% fall in just a week.

SPX 1880/1885/2190/2195 Iron Condor
Looking good. No concerns here.

RUT 1010/1015/1240/1245 Iron Condor
Also looking good. Decision points for this week are around 1080 and 1210. With RUT currently around 1162 there is a 7.6% downside room and 4.1% to the upside before I need to defend anything. Those are pretty good odds in my favor.

Action Plan for the week
Realistically speaking, the Nov 2130/2140 SPX Credit call spread is the only thing that might need my attention this week at the adjustment point I mentioned above.

If we reach a short term overbought extreme, I will sell a November RUT Credit call spread. Above 1220 would be nice.

On a sideways or falling market I won't do anything.

Economic Calendar
Monday: Europe's Manufacturing PMI, USM ISM Manufacturing PMI
Tuesday: ECB President Draghi speaks. US Crude Oil Inventories
Wednesday: ECB President Draghi speaks. ADP Non-farm Unemployment change. ISM Non-Manufacturing PMI. Fed Chair Yellen speaks.
Thursday: ECB President Draghi speaks
Friday: Non-farm Payrolls. Unemployment Numbers.

Stay Lazy my friends!


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