MyTradingBlog

Schaeffersresearch.com: bullish.  Major indexes held the support levels (SPX above 1100 and 40 month moving average), RUT above 650.  VIX is of special interest.  Since 1996, VIX at its peaks always represented great buying opportunities (Did you hear news reports of increasing corporate insider buying during this downturn?  Those guys know this is a buying opportunity that one doesn’t see often).  Another piece of information worthing noting here is that in the 2nd part of Schaeffer’s Monday Morning Outlook, it looked at the Investor’s Intelligence Sentiment Poll, it found the number of bulls actually increased in the week ending Aug. 5th when the stock markets suffered it’s worst 2-week crash since 2008.  It then compared to other situations like this and found the intermediate (3 months out) outlook is more bullish than average.

ChartAdvisor.com: cautious.  Overall, I like reading Schaeffer’s more than Chartadvisor, because schaeffer’s looks at the market from more perspectives.  Chartadvsior is pure technical analysis, with nothing else.   I learned a lot from ChartAdvisor.com, though, and I highly respect their technical analysis.

VIX:

VIX Chart (Courtesy of Yahoo Finance) since 1996.  With the exceptions of 2008 financial crisis when VIX shot put to much higher than ~40, all the other peaks were ~40.  This time around, there is no reason to believe VIX should behavior differently than in the past.

My take: first of all, I sat tight through this difficult time.  I actually surprised myself that I remained so calm without any worry or fear, let alone any panicky knee-jerk reaction selling.  I have been through many cycles like this.  Although every time the circumstances are different, but the pattern is pretty much the same: stock traders got spooked and panicky selling ensued.  Then the markets recover, some happy and many sad.  Just as I told one of my friends on this topic, markets go up and down.  Even bear markets ultimately recover and turn into bull markets.  As long as the stocks you chose qualify for my style of investing (Criteria to set up covered call positions), leave them alone.  Keep selling time premiums every week, every month or every once a while depending on your situation.  This is one sure way to make money.  I did, so can you.

I did see the face value of my accounts going lower, however.  My account has recovered most of its loss.  The only stock that I wish will go higher faster is FFIV (since my strikes are 100 and 105.  Therefore there is still quite some room for it to go up to my advantage).  I wish I had more buying power now for me to scoop up more shares.  This type of buying opportunity happens very rarely (thank God it doesn’t happen more often).

Take home message: It’s a great time to buy stocks you like.  But only do so with your hedge (covered calls).

ChartAdvisor.com advises investors to be cautious.  It believes there is a chance of near term bounce and the stocks are cheap in long term views.  But the markets will take some time to stabilize.

Schaeffersresearch.com: The 2nd part of this post is interesting.  It shows historically, the markets tend to be volatile and negative in 1-2 months following such a big crash.  But in 3-6 months term, the bounce is greater than average.

My take: Wall Street goes through this type of volatility several times a year, although the degree of volatility varies each time.  SP500 fell from 1217 on 4/21/10 to 1028 07/-06/10: a 15.5% drop in 76 days.  Just one example: SP500 fell from 1345 on 07/22/11 to 1199 on  08/05/11: a 10.8% drop.  We have been through this before and the markets recover.  Point: unless you face a margin and are forced to liquidate your positions, you should hold on tight and NOT to sell at this very low price levels.  Actually, I advise to add positions during such a panicky period.  The time to make real money is exactly the times like this one we are in the middle of.  Of course, I always use covered call (simultaneously) when I add new positions.  “This too shall pass”.

Schaeffersresearch.com: debt ceiling resolution or the lack thereof is the trigger now.  The problem is that the market has not factored in the possibility of a default or a downgrade of US credit rating.  Should a default or credit rating downgrade actually happen, it is very likely that the market will fall significantly.  The fallout of such a default or downgrade is unknown and may very well affect US economic growth negatively.

Chartadvisor.com: the market is oversold, but due to the same reason (above), the oversold market can get more oversold.

My take: stay put.  I personally don’t think the US will default on its debt, but a credit rating downgrade is likely, with or without an agreement by Aug. 2.  This will affect the market in the near term.  I really can’t believe that the politicians from both parties are ignoring the big picture risk to our already weakened economy and care only about their so called “constituents”.  Those constituents may not understand what the consequences of a default or a downgrade are for the future.  Good politicians are supposed to be visionaries and lead the constituents, not always just act on whatever they want.  If all an elected politician does is to reflect whatever his/her constituents want, why do we need a politician?  We can very well have a web-based pollster or a robot to do this job.

• Schaeffersresearch.com: very bullish long term.  They are predicting a year end rally.
• Chartadvisor.com: none available for this week.
• Vix: 17.52.
• Risk factors: obviously the debt ceiling issue is going to affect the market this week.  With both parties caring more for politics than the welfare of the country, we still hope there will be some solution to this gridlock, even if a temporary one.

My personal take: I will buy any market weakness.  The investment term should be medium term (months to at least year end).  One possible play is to by SPX call options that will expire in 6 months or so and hold it until year end.

1. ChartAdvisor.com thinks the markets are uncertain now.  It may continue upward to eventually break out or go downward to breakdown the June lows.  It asks for patience and caution.
2. Schaefferesearch.com is, however, more bullish.  SP500 support 1295-1305.  Resistance: 1333-1340.  A higher VIX also favors bulls for now.
3. VIX: 19.53 at Friday’s close, remains at the higher end of the 16-20 range, a signal for bullishness.  “In the 2011 calendar year, a strategy of selling equities when the VIX approaches 15 and buying equities when the VIX advances above 20 has proven to be a rewarding timing approach.”(Schaeffersresearch.com)
4. Market moving factors:
   1. earnings report seasoning.
   2. US debt debate
   3. European fiscal problems (Italy now).  Don’t we all hate Europe by now?  Their problems seem endless.

My take on the above: cautious set up long exposure with hedging in place.  When choose stocks, follow these criteria that I set forth earlier.  For covered calls that will expire at the regular Aug cycle, you may want to sell calls out of money (due to the bullish forecast and very likely a post Aug 2 market rally).  If you are like me, interested in experimenting with new strategies, I am contemplating to try the following strategy: buy calls when bullish and buy puts when bearish.  In the past 6 – 9 months, I tried option spreads (almost always bull spreads), but I am abandoning option spreads now.  It is too risky.  I’ll try small amounts of call or put buying (not selling, the risk is too high) for fun.  I will choose those options with a longer term (1 -2 months to expire).  I will then close these options when the market conditions change, before expiration.  For example, with the current market condition as bullish, I am considering to buy calls of stocks or index ETF with at least 4 weeks before expiration.  When to sell? When VIX approaches towards 16 and when SP500 is closer to 1330-1340.  If you are long an option, try to sell them at least 1 week before expiration, as the time value will depreciate very drastically in the last week.  The bulk of my investment portfolio (>95%) is in covered call which is one of the safest and yet profitable investment strategies out there.

I personally also favor a bullish rating, although I expect further market volatility, esp. with the US debt debate.  I don’t expect the politicians are giving to give us an easy answer to the debt ceiling issue.  But the good news is Aug. 2 is coming soon and we’ll have an answer by then.  I anticipate that the US debt ceiling will be raised (US debt default is just too catastrophic for the politicians to handle and no one will win if that happens) with or without concurrent budget cuts and tax increases.  After Aug. 2, unless the European financial problems becomes major headlines again, we should see less volatility in and a smoother sail of the markets.

Happy trading.

rc