What a dismal week!
According to the press it has been the worst week since March. Between the 6th and the 10th of March, the S&P dropped 4.6% (I’ve marked it on the graph below). That was nasty. This week, the S&P dropped 2.6%, which is not quite so bad – but still painful. Let’s examine the charts.
SPY Chart
Well, the first thing you notice is that the uptrend line has been broken quite definitively, which is not a good sign. Next, we notice that the first support level has been broken, again definitively. What is next? There is a weak support line around $430, then the next one is around $415, which is at the official correction level (10% drop from its most recent high) and it will be nasty if it goes down that far. It will also be our ‘get out’ signal because (on the current trajectory) the 10 SMA and 200 SMA will cross at about that level.
Will it get there? Noone knows, but you can be sure there will be a lot of doom and gloom in the financial pages unless there is a decisive rally. Well, we had our ‘get in’ signal at $395 so we will be giving away a large chunk of this year’s profits if it happens. But let’s not jump the gun.
If we look at what happened after that really dismal week in March, we can see that it heralded the start of a new bull market. If we had got out, we would be scrambling to get back in again. Maybe right now we are looking at a bear trap, and we just have to grit our teeth and resist the temptation to get out until we have had a clear ITM signal.
Friday was triple witching night – monthly option expiry, which typically has high volumes of options trade and can mean unpredictability. Option traders with expiring options will find out whether they are in the money or not, and have to decide whether they are going to close their positions or roll them to a later date. SPY closed almost exactly the same as the day before (Thu: $436.29 Fri: $436.50) but is had opened below that ($433.37) resulting in a green candle.
SPYG Chart
SPYG is following SPY very closely, so all the above comments are relevant. I have drawn in the equivalent support lines – but do remember that support lines are just lines on a chart! They describe what often happens, but have no magical powers.
QQQ Chart
Although not part of the ITM strategy, we keep an eye on QQQ, the Nasdaq ETF. Although the chart doesn’t look so dire as SPY (mainly due to the fact that it started its up trend earlier and has increased by more) it shows much the same patter. It has dropped 7% from its peak, and another 3% drop will see it in correction territory. Last week it dropped 3.2%, more than SPY.
Technically, the support line at $358 hasn’t been broken, as although it has traded below it intraday it has not closed below it. If it breaks below, the next support level would be $320, which I also have market on the chart (magenta lines).
VIX Chart
As is to be expected, the VIX is ticking upwards, but is still significantly below 20 which means that technically we are in a low volatility market. But it certainly doesn’t feel that way!
ITMeter
I am becoming more wary about the bull market continuing. We haven’t reached a get out signal, so I am going to trust the system and stay in.
Regression towards the mean
Way back at university I was studying stats, and of course knew about the regression towards the mean, which is a statistical phenomenon that means if one sample of a random variable is extreme, then the next sample is likely to be closer to the mean.
I see a lot of headlines claiming that reversion to the mean means that the stock market is going to fall – but does it really? Firstly, what is the mean? If we take the average of all SPY data then the mean is probably around $200. Is it likely to fall that far? Unlikely. Do we instead take a moving average? If so, which one?
I have graphed SPY since its inception with the 12 month SMA, and you can see that it spends a lot more time above the mean than below it. Clearly, using regression / reversion as a predictive tool is going to be right sometime – just not very often.
Daytrading Experiment
Tom Hougaard is opening his trading channel again today, but only for the EU market. I will try to get back into. I am strangely reluctant about it, but I will persevere.
Email Notifications
I think I have sorted this out. I found a lot of people on the web database that hadn’t been uploaded to the Mailchimp DB. It is an automatic process, and some of the forms had not been set up properly. Mea culpa. Apologies. Sometimes I regret not having a big staff of IT guys that I can get to sort things out, instead of which I am the bunny of last resort.
The Futures
Looking at the futures, I see that they are creeping up, but we are still some hours away from market open.
I feel quite aggrieved at the market at the moment; I thought we were entering a nice bull market where we could all make lovely profits. Alas, the market has other ideas. It cares not one whit what I am feeling!
Let’s hope it is a bear trap, that we haven’t been caught in it, and that SPY is going to rise again. Please!
Heather
19 Responses
Hi Heather,
Why are SPY options so much more expensive these days compared to a year or two ago?
Thanks again for all your helpful insights! I love your strategy!
Hi Charity, nice to hear from you again – and great question.
I have been pondering this myself, and just want to do a bit more research before I try to answer your question.
Can you check back in a day or so?
Thanks!
h
Hi Heather,
As we keep a watchful eye on the market in its possible downtrend, my option – 35 strike, Dec. 15 (about 3.5 months from now) – is pretty much at the right point, if not barely over the 1% mark of effective price vs market price, in terms of where to buy for the ITM SPYG strategy. I look for the strike price to be approx. 60% of the market price and within 1% over the effective price vs market price. In this instance, would the strategy have an individual roll out their option to a further month (i.e. Mar. 15) or wait a little while until the market shows some clarity of where it is going: either downward, flat, or upward? My gut is telling me to hold until we get a little closer to 60 days to maturity of the Dec. 15th date before rolling out. Thank you!
Hey Elijah (?)
Your gut is right – no need to roll until you get a bit closer, say late October.
And it looks as though we may be seeing a turnaround – the futures are up, Nividia posts its results today, so we should see some action – would be good to know what way!
h
Yes, all eyes on NVDA today.
Yes – and it is good! Quote:
Nvidia reported Wednesday better-than-expected second-quarter results and upbeat guidance as the race to adopt generative artificial intelligence continues to bolster demand for its chips.
NVIDIA Corporation (NASDAQ:NVDA) was up more than 9% in afterhours trade.
Nvidia announced adjusted EPS of $2.70 on revenue of $13.51 billion. Analysts polled by Investing.com anticipated EPS of $2.07 on revenue of $11.13B.
Should be a good day today!
h
Bravo on the three HC books I’ve read. I’m about to order the “Timing” book. Help request: I’ve tried to extract an Excel “cheat sheet” for a concise list of Bull and Bear Market Trading Rules. My result is less concise (and perhaps less accurate) than a counterpart trading rules cheat sheet that you might send me. Thanks in advance for your concise list of ITM and I TMB trading rules. Technically: what time-period charts do you typically look at ? Best Regards, Lowell
Hi Lowell,
I am afraid that I don’t have an Excel Cheat Sheet – but I can direct you to where the rules are set out (and remember that they have been backtested on SPY and SPYG, not individual stocks)
– Bull Strategy: in Chapter 8, subheading ‘Buying SPY Options’, it is on page 171 of the hardback edition, and summarised in Chapter 8 Highlights (at the end of Ch. 8)
– Bear Strategy: in Chapter 5. The Ins and Outs. – subheading ‘The ITMB Rules’, page 72 of the hardback edition. (the second last page of the chapter)
Time period – I always use daily charts (unless I am looking at long term trends), and the back tests are all done on daily charts and use the closing prices.
Hope this helps – please get back to me if not.
h
Hi Heather,
Thank you for your weekly updates. September is usually bearish so I expect the SPY to go down. By the way, I live in Los Angeles and it has been raining since Sunday. Please stay safe, everyone during Hurricane Hillary.
Sincerely,
George H.
Hi George – thank you, its nice to get appreciation.
September usually bearish? Sounds like a challenge – I must get out the Excel spreadsheets and check!
Re the hurricane – I have just googled and see that it is weakening, so hoping everyone is safe. I see that flooding is expected – that’s not good. Having been through a couple of floods myself, its not the water that does the damage, its the mud it brings with it. Everything gets completely ruined. Hope you and your family are OK.
Stockcharts.com has a seasonality feature which makes this analysis relatively workfree.
Just enter symbol into seasonality function and it gives monthly analysis.
Default is last 5 years, but you can stretch it out to last 20 years.
Over last 20 years, SPY has been down an average of -0.4% in September (the weakest of any month) but it has been up in 63% of the last 20 years.
Some of those Septembers must have been real stinkers! Hahaha
Hey@ Just had a look at it, fascinating.
I was just using the free version, and don’t think that it is as good as the one you are looking at, because it only gives the percentage of months that finish higher, not the magnitude of the change – was it a big change or a little one?
September does look like a bad month, both for SPY and QQQ, although I’m not sure how they get 25% and 75% if it is calculated on 5 years? I would have thought it would have to be 20/40/60/80/100?
Maybe I need to subscribe and have a proper look. I am trying not to as I have subscription all over the place, and they auto renew, and I can’t even remember what they are for!
So do let me know if the subsription version is more detailed than the free one.
Thanks for letting me know!
h
Are you sure the average percent change for particular month does not appear at the bottom of the bar for that month?
They also have year by year results above the month display.
I logged off the website and entered using free charts.
It seems to be the same as when I’m logged in as a member.
They have a free trial for one month.
I’m an Extra level membership. It’s about $30 a month.
Good morning Heather,
I love your ITM options method because it is low stress and with your 25 years of experience in the stock market, you offer a wealth of stock market experience.
Sincerely,
George Halongton in Los Angeles
Hey George!
Thank you! How kind of you to take the time to do this.
h
The only person who could predict the market top was Bernie Madoff.
Heh Heh – you’re right there!
Why didn’t you get us out when we were up 30%?
Hi Paul, we can all be brilliant traders in hindsight!
Just like after the lottery has been drawn we can tell you the winning numbers – just not before!
I don’t know of anyone who can say when we are at the top, or bottom, of the market. You can only know in hindsight.