Is it a new bull market?
Well, the ITM signal got us back into the market on January 26th, and so far it has been right if not exactly spectacular. In the six trading days since then SPY has increased by around 2%, not quite enough to retire on, but going in the right direction.
Friday was a strange day on the market with the jobs growth surprise, but although it was a down day it has formed a 3-candlestick upside continuation pattern, an upside Tasuki Gap. It isn’t exactly a textbook example (it rarely is). But the basics are there, implying that the uptrend will continue. However, as always, remember that these signals only work some of the time so we can’t reply on it.
But we're still in a bear market!
I have been getting quite a few queries about the wisdom of making a bull trade when we are still technically in a bear market. That is correct, we are still in a bear market. I have marked the chart above – SPY has to get to $427.87 before we are technically out. However, the bull signal was unequivocal, and indicated that the bulls were in charge and it was time to make a bull trade, not that it was necessarily a bull market.
I understand the reticence and recognize that this isn’t what has happened in the two most recent bear markets (GFC and Covid). Both of those dropped a lot more than this current bear, which has only (!) dropped 25% from the peak of $477.71 on January 3rd, 2022, to the low of $356.56 on 12th October 2022.
The definition for the start of a bull market is not so clear-cut as the definition for the bear market. Some claim that a rise of 20% is enough, others stipulate that the rising prices must be over 2 months or a longer period, and Investopedia goes all out, insisting that:
The commonly accepted definition of a bull market is when stock prices rise by 20% after two declines of 20% each.
To me, that last one makes no sense, as according to that the bull market 2021-2022 didn’t happen!
Day Trading Revisited
I know that I call day traders ‘temporary traders’, simply because the stats show that around 90% of them lose money and are wiped out, and personally I have never met anyone who did it for more than a couple of months. But maybe I have been a bit hasty. Just because I have never met a successful one doesn’t mean that they don’t exist, like black swans.
In the last blog post, I recommended the Tom Hougaard book Best Loser Wins, and I had checked out his results (impressive) and his method of trading. I decided to give it a go and see what happened.
I opened an account with $5,000 and followed his live trades for a couple of weeks, but basically, I found that I absolutely sucked at following his rules. I kept branching off and doing my own thing, with mixed results. The first week I was up over 20% and thought myself a genius, and got ready to put in my order for a helicopter. The second week was dismal, losing the 20% and then another 4% just to rub it in.
Anyway, I thought that I would try an experiment. I would follow his live trades every day, exactly (no going off on my own tangent) and post my results here. So I have adjusted my account back to $5K, let’s see how it goes.
Doom and Gloom
As is to be expected, the experts are lining up to tell us that this is a bear trap – they may well be right, we’ll have to wait and see. But some of the funnier headlines:
IT’S HERE… “I’m Predicting The Biggest Crash, January 2023!!!” | Robert Kiyosaki’s WARNING
And he went all out:
I predict silver going to go to $75 and gold to $3,800 in 2023.
Well, the January thing hasn’t worked out so well, so maybe I wouldn’t rush out and buy gold just yet. Kiyosaki has form: Last year’s prediction:
A global market crash and economic collapse in 2022
And, of course, way back in 2015 he predicted:
2016 will bring about the worst market crash in history!
I am not picking on Kiyosaki, just using him as an example. Let’s pick on someone bigger: Morgan Stanley:
On December 31st, 2020, the consensus estimates, according to Factset, for 2021, 2022 and 2023 were $204.95, $223.46 and $245.01.
Well, even after a bear market we are well over their estimates!
The Nasdaq
I thought that you may be interested in the Nasdaq performance. It has dropped more than SPY, 35% from the peak on 22nd November 2021, to the low on 28th December 2022. Interestingly, it is almost out of a bear market, but hasn’t quite traded above the $312 level which is the bear exit although it has touched it in intra day trade.
The VIX
The volatility index at 18.3 is the lowest it has been for just over a year, since the start of the downturn. Below, I have shown a weekly chart for the last 5 years, and you can see that while it is above the pre-Covid level it is still not classified as a volatile market.
Stock Market Jokes
I thought that this post needed lightening up a bit, so I googled ‘stock market jokes’. They were terrible. Like:
Q. How do you trade marijuana stocks?
A. Buy high, sell higher! <groan>
Surely someone has better jokes than this? Please leave them in the comments and give us a laugh.
ITM Reader Q&A
Hi Steve – have not backtested the ITMB strategy on SPYG, so the short answer is I can’t recommend that you do it. You can always backtest yourself – just step through the charts applying the ITMB rules. I don’t automate backtesting, as I think you have to be presented with the actual chart so that you know how it really looks, and practice how to make the decisions based on the rules. Hope this helps.
I have used vertical spreads, but I am not a great fan. Just like covered calls, they are limiting your upside although I do understand that they keep the costs down. I always seem to do spreads just when there is a big move coming and then I miss out.
Having said that I was playing with very short-dated cash-secured puts for the last couple of weeks, although I am not a fan of them either. While I didn’t get exercised (which is good) it was worrying to know that if the market suddenly dropped then I would be left holding the baby, which did not make for restful sleep.
So – vertical spreads – if you can find ones that are worth it (profit-wise) then go for it but be aware that on long-dated options you may miss out on good profits.
The 10/200 cross happened, but it was just a touch. We were not sure that it actually crossed until the next day. Have a look at the snapshot below:
On the 24th it touched but had not crossed. On the 25th it closed with white space between the SMAs so that was our signal – but of course we couldn’t get in until the market was open the next day on the 26th. Which is a nuisance, it would have been better the day before but we didn’t know the signal was going to complete until the close. However, if you had been watching the market it would have been great to get in at, say, 3:55 on the 25th as your results would have been better. (all prices used are closing prices)
Hey Rob, re the effective price – I understand that options are expensive now – although with the VIX so low they shouldn’t be. But they are what they are and we have to deal with it. In the last blog update I looked at what options to buy, here’s a link: https://heathercullen.com/is-it-a-baby-bull/ – but, of course, that was last week, so let’s look at possibilities now.
SPY is trading at $412.35 so we are looking for an effective price less than $417 (rounded). If we start at the $205 strike (50% leverage) expiry Jan 24 the effective price is $416/$419 (bid/ask) which is over the limit, albeit by just a little. We have 2 choices: either move the strike down (although we will be paying a larger premium) or move the expiry closer.
The $200 strike has an effective price of $415/$419 which fits, or we can use the September 23 $205 strike which gives us an effective price of $415/$417 which fits. Of course, you are going to have to roll it earlier than one year, but if you are willing to be more hands-on it is a good choice.
Please note that the above examples are only giving leverage of 50%. If you want a higher leverage, say 60%, then you are going to have to live with the effective price being over 1%.
Oh for the days of cheap options!!
No, I wouldn’t wait, but that is just me. I have a rule (for myself) that if I have decided to get into a trade just get in. Don’t wait. I have no idea what the Fed is going to do, and if I try to predict what is going to happen I invariably get it wrong. Maybe I should work out what I think is going to happen and then trade against it! So no, there will always be news, and unpredictable things will always happen, so just look at the charts to see what the market is doing.
Gregg that sounds great. My email is ifo@HeatherCullen.com so look forward to reading it.
Quite a few people have contacted me about starting a bull trade in a bear market, so I talked about this is the section above. I haven’t done backtesting on waiting to get out of a bear market so I don’t know what the results will be. They may be better – you can easily check by backtesting adjusting the ITM rules after the bear markets to hold off until it is out of a bear market and compare results. And do let me know what your results are!
A good question, but I am afraid the answer will be disappointing. There is no theory behind it, it was purely pragmatic! I backtested the 50/200 sma and was not impressed with the results. I tried all sorts of combinations and the 10/200 produced the best results so that’s what I went for. No theoretical framework, just practicalities!
It is to maintain your leverage. If you buy at a strike of 50% of the current price then you have 50% leverage (i.e., if SPY goes up 5% you go up 10%) When the market is trending strongly up (oh, I wish!!) then your strike can drop below 50% leverage, so you have to roll up to maintain that.
For example, SPY is currently at $412 so a strike of $205 would give us 50% leverage. If SPY reached $500 (oh, yes, please!) then a strike of $205 would mean that you only had 41% leverage – in other words if (at that time) SPY went up 5% then you would only go up 8%. (rounded). The way to maintain your leverage is to roll up, i.e., buy a higher strike price.
Not sure that I have explained that very well, hope you understand.
Oops, forgot about it last time. But now that we are almost out of a bear market we had better think of a new name – how about ITM-meter? ITMeter?
As usual, I don’t know. But then no-one does, not even the Morgan Stanley analysts! It may be a bull trap. If you look at last year, we had three big and two small bull traps. This could well be another one – but there are a couple of things suggesting that it is not:
- The downtrend line has been broken (see the dashed line on the first chart above). It was a very accurate downtrend with SPY reversing every time it hit it. Now it has gone right through.
- This is the first time SPY has traded higher than the previous bull trap.
I am not saying that it won’t reverse – it could – just pointing out 2 differences this time. Of course, it may be wishful thinking – I am sooooo fed up with the market, I just want a nice juicy bull market, or at the very least a stable sideways market so that we can try out some other strategies.
However, the market does what the market does, it doesn’t care one whit what I want or think!
Not getting notification of ITM updates?
Some readers have contacted me saying that they are not getting notified of updates, and have sent me emails which, I am afraid, tend to get lost in the hundreds that are coming in. If you are not getting the update notification, please fill in a contact form, because then you will go into the database and I won’t lose you!
ITMeter
Looking forward
Let’s hope that it is really a bull, and we are in for better times. Goodness knows, after the last year we deserve them!!
Heather
14 Responses
Do you use the simple or exponential moving averages when watching the 10 day and 200 day moving averages.
thanks
Hi Del – I ue SMAs not EMAs. There is a section in the bull book about why, and I will post a more detailed answer o today’s blog.
Hi Heather,
With SPYG, do I choose the strike price with delta of at least 0.80 with expiry in September 2023? Thank you.
With SPYG at $53.78 and the lowest strike for September being $30 with a bid/ask of 24.10/24.88 this will give you leverage of more than 50% and an effective price of $54.10 / $54.88 which is 0.6% – 2% away from the current price. I don’t tend to use delta but rely instead on the effective price. Hope this helps.
HI George, I will address this in the Q&A on the blog, which is going up shortly.
Thank you, Heather. The reason I mention about the delta of being at least 0.80 is because of the link below.
https://www.optionsplaybook.com/rookies-corner/buying-leap-options/
Is it time to buy the SPYG? It looks like the 10 SMA crossed up over the 200 SMA.
Hi C, yes, see presvious reply. The SPYG Golden creoss has happened and been confirmed. Good luck! h
I am seeing the golden cross for the SPYG as of 2/14/23. Are you observing the same thing as well? Is time to get in? Thanks
HI Pascal, yes, there has been a golden cross, confirmed with white space, so the buy signal is triggered. Currently, SPYG is in a trading range 54 – 55, so any break above 55 is a good sign. Good luck! h
Hi Heather,
Have you tried applying Trader Tom’s “add to a winning trade” philiosophy to your own systems (ITM/ITMB). I would say that, by his standards, you already have an “exit point” defined and you don’t have a profit target, of which he would approve.
Adding to a trade is tricky, especially in the recent market, plus it’s hard to back test – however, hitting it right is the lottery for one of those long, drawn-out bull or bear trends. He does say (videos and book) adding to winning trades is the difference between very successful traders and unsuccessful traders (I disagree with this – I think there are a lot of ways to be successful, they just don’t involve the numbers he trades with).
Any advice for those of us wanting to live dangerously and add to winning trades? Where would you add? What would you use for stops (if different than now)?
Thank you,
Ronny
Hey Ronny – thank you, lots of things to consider. Let’s take them step by step:
Have you tried applying Trader Tom’s “add to a winning trade” philiosophy to your own systems (ITM/ITMB). No, because we are DITM and I tend to be fully invested, just leaving enough to try (OK, play with) some other (non ITM) strategies. So, yes, would probably be a good idea for those who didn’t jump in boots and all, but can’t say what the results would be as haven’t backtested it.
I would say that, by his standards, you already have an “exit point” defined and you don’t have a profit target, of which he would approve. Yes, we have the exit point, but no target.
Any advice for those of us wanting to live dangerously and add to winning trades? No advice – as I say, with the ITM Bull strategy you tend to be fully invested – but of course, we are traders and can’t resist a side flutter (as long as it is only a SIDE flutter) so maybe a couple of little OTM options might be fun – but as long as they are not significant in terms of your overall portfolio – maybe 2 – 3%?
Where would you add? I think when I felt that I had got it right – but that isn’t helpful, I realize. I tend to be ‘IN means ALL IN’ but am prepared to get out when the market goes against me, proving that I am wrong.
What would you use for stops (if different than now)? I think that I would use the same stops as these are the ones that I have back tested. However, we mustn’t be rigid, and be open to someone doing it better than we are. Hubris is not a good thing. But read on . . .
And here is the funny thing: After declaring that I would NOT do my own thing because I was going to report back to you all, I traded exactly with him at the start of the European market – now the account is $5,118 (It is hard to get in exactly at his entry points, there is a lag between him saying it and one clicking.) But when I came up to my office an hour later I saw that if I had stayed in the trade (with a tight stop) instead of closing them when he said I would have been up another $800+. So a bit annoyed at this point – my instinct was to stay in the (with tight stops, of course) To be fair, he has just posted that he wants to kick himself, by cutting the trade short he made 11 points instead of the 40 it is now! He is very honest and I really respect that.Actiually . now it is continuing to go down, would have been a LOT more than 48. Dammit, what a time to get ethical!! Kicking myself. A lot.
I can’t work out how to put images in answers, as there are quite a few charts I would love you to see – so unless anyone can advise me on putting them here It will just have to wait until the next blog.
But, Ronny, thank you for your questions, not sure if I have answered them adequately, but I love it when people make me think and you did!
What Heather is doing is long-term investing with a market timing indicator. That’s different from intraday trading or swing trading (lasting from days to weeks) where it probably makes more sense to add to positions in some trend-following systems.
It’s possible adding to a position as the market continues going your way could work. But there will be trade-offs. For example, after the COVID drop, 2008 financial crisis or dot-com 2000-2003 bear market, you’d be much better off going “all in” on a buy signal than gradually adding as the market rocketed back up. During whipsaw markets with more false signals, it would take away some of your risk. My guess is overall it’s better to be all in or all out with most long-term market timing, but I’ve never tested it.
Heather-I appreciate you taking the time to answer my questions–thank you!