Are We There Yet?
Identifying the top of the market is very easy in hindsight. It always seems so obvious, and everyone is an expert after the fact. But it’s not quite so obvious when you are hard up against the right hand side of the chart!
I thought it would be good to look at the recoveries after the bear markets of the last 30 years, and see if we can glean anything from what happened after they reached new highs.
The 2022-23 Bear
That is the bear we are recovering from now. The chart shows us surpassing the all-time high from January 2022. The big question, of course, is can it continue going up?
The Covid Bear
The Covid Bear was unusual in that it dropped faster than any other bear, and was over more quickly than any other bear. After reaching its low point in March 2020, there was a V-shaped recovery with new highs being made in August of the same year. But it didn’t stop there; after a couple of wobbles in September and October it continued to climb until January 2022. The start of the slide into the 2022-23 bear.
The Baby Bear
The bear market at the end of 2018 wasn’t a fully-fledged bear market. It is often not counted as a real bear market as the Dow didn’t drop below the 20% required for a bear market. The most it dropped was 18.8%, so it didn’t qualify. However, the Dow has only 30 stocks and isn’t representative of the market as a whole. The S&P 500 is far more representative as it consists of 500 stocks making up 80%of the market.
It briefly dropped into bear territory ($293.58 on 20 September 2018 and $234.34 on 24 December 2018, a drop of 20.18%). But it only stayed there for 1 DAY! The littlest of all the bears, and it bounced up again quickly to make a new high in April 2019, although it faltered a little in May and August.
The Biggest Bear - The GFC
The Great Financial Crisis cannot be forgotten by anyone who lived through it – even if you were not interested in the stock market. It dominated the headlines. It was triggered by the collapse of the subprime mortgage market in the US, but caused financial turmoil worldwide.
The S&P 500 fell 57%, decimating people’s portfolios and retirement savings. A drop of 57% needs a lot more that a rise of 57% to offset it. To get back to where you started the market would have to climb 132%, not the 57% many people assume.
But it was the start of a long secular bull market. Although it took 6 years (until 2013) to get back to its pre-GFC high, it then proceeded to almost double in the next 5 years.
The Longest Bear
The 2002 bear was not a good time. Coming hot on the heels of the ‘Tech Wreck’ (the Dot Com Bubble Burst where the Nasdaq dropped 75%, the S%P dropped 50% from March 2000 to October 2002.
This is not a good news story; over the next five years it climbed steadily, matching its previous high in late 2007 – just in time for the GFC.
If you had bought into the market at the start of the millennium you would have had to wait 13 years before you started to make a profit. Buy and hold is the best strategy? Pull the other one! There is no way you can persuade me that holding on to bullish positions through bear market is a good strategy.
Bear With Me
I should update you on the update to ITMB, the near market strategy book. It is proving a bigger job than I anticipated. As it was published in 2021 it missed the 2022 – 23 bear market. I am completely updating everything to take this into account, and the also the different option pricing.
I am planning that on the weekend it is published to reduce the price of the paperback and hardback of both the bull and the bear by 50%, (for a few days only) so that readers of this blog can get the updated version at less than cost price. I realize that the charts may be hard to read on some devices and having a printed copy is preferable.
I will post on this blog when this is going to happen, I am aiming at the weekend of the 24th March, but will confirm. I need to get all this updated and finished before I swan off for my summer in Europe – yes, gadding about again this year!
MailChimp and Email Update
I have given up on Mailchimp, and am trying a new email provider. I have uploaded the subscriber file, authenticated the website so it seems as though everything is set up properly, and should go OK.
We’ll see when I try to send out the email. Am hopeful. Fingers crossed.
To the markets . .
Generally, a good week, with a bit of a downer (in more ways than one) on Friday. Lets look at the charts:
SPY Charts
Notwithstanding Friday’s red candle, the overall trend is still up. Even on Friday the low was higher than on the previous day. I am still half expecting that there will be a dip to test the 500 level – but I hope that I am wrong!
And in perspective, I have to admit that the upward trajectory looks very steep, almost as though it is time for a pullback – but we won’t try to second-guess the market. We will wait until the market tells us what it is doing!
SPYG Charts
SPYG isn’t quite as encouraging as SPY. You can see that Friday’s candle was a ‘bearish engulfing’ candle, meaning that it completely ‘engulfs’ the previous days trade. Why? Because SPYG is made up of growth stocks, and so has a greater percentage of tech stocks. NVIDI – which we will look at shortly – had a very bad day on Friday, dragging down the Nasdaq by 1.5%, which in turn is affecting SPYG.
In perspective, we still have not taken out the previous high from January 2022.
QQQ Charts
QQQ, like SPYG, had a bearish engulfing candle on Friday, closing right on the 10-day SMA.
And in perspective we have been in blue-sky territory for a while now:
And who should we blame for the Friday dip?
The Culprit: NVIDIA!
We’ve been following NVIDIAS stellar rise, with a bit of a wobble on Friday. Well, rather a large wobble, really.
AMD (Advanced Micro Devlices, competitors of NVIDIA and Intel) also had a big wobble – it has been a stellar performer in 2024 also – it hasn’t quite doubled but isn’t far off. Both these contributed to the tech stocks bringing the indexes down.
VIX Chart
The VIX continues at low levels
ITMeter
The week ahead
Well, more data – we’re now waiting on CPI data due out on Tuesday, so I expect that trading will be light today. Why are we interested? Because the Fed want to see inflation weakening before they will cut interest rates. It is expected that the figures show that inflation is ‘easing’, but if it doesn’t then expect the market to dip.
The Futures
The futures are down slightly – I had expected them to be pointing lower after last Friday’s drop, so maybe that is a good sign. Let’s hope so.
Fingers crossed for a good week!
Heather
14 Responses
Hi Heather, I hope you are well! … SPYG market price is $71.67 today on 3/17. If I buy at 60% of the market (second question: Does ITM Bull SPYG still follow 60% or is it 50%?), the lowest strike price showing on the options chain is 40, which costs $34.30 (ask). If I calculate the effective price at $74.30, then percentage over the market price is 3.66%. I’m not sure if I am calculating this correctly or if these options are simply more expensive than they used to be a year ago in 2023 (in which does the strategy need to change?).
The ITM bull strategy for SPYG dictates making the trade with the effective price floating around (or at most) 1% over market price. If following this strategy to a Tee, I would not make the trade as I would not be able to follow it strictly. How could one navigate these waters given the above information?
I am holding Jun 21 SPYG, which is 96 days from expiry with a trade price of $26.63.
Hi Eli – sorry for late reply – will answer this in the latest blog post
h
Hi Heather,
I have very much enjoyed your weekly blog posts, and continue to find them very helpful and insightful! As far as the ITM approach and all the talk about euphoria possibly looming, I was curious what approaches you tend to use to keep an eye out on whether we are indeed getting close to a euphoric market mindset. I know in your books, you mention keeping an eye on news headlines, go guage the subjective mood of the market, however I was wondering if there are any other techniques that you use.
Thanks
Hi Bradley – sorry for late reply – will answer this in the latest blog post
h
Hello, I’ve just read both of your ITM and ITMB books. I am looking at options just over 1 year old. The lowest time value I can get is about $4.63 (where the intrinsic value is $335.97 and the middle between bid and ask is $340.60). at this time value/intrinsic value, the strike price is 35% of the current price. The delta is 0.998. This doesn’t meet all the requirements laid out in the ITM book. What would you suggest I do? Thanks, Heather H.
Hi Heather – sorry for late reply – will answer this in the latest blog post
h
Dear Heather,
Thank you for your weekly and timely blog to educate and enlighten traders and investors. I am wondering if we can use your ITM options method to buy LEAPS call of undervalued stocks such as Apple. Thank you for your guidance.
Sincerely,
George Halongton in Los Angeles
Hi George! Nice to hear from you!
Re using ITM on ‘undervalued’ stocks – it would be a great idea if we could know definitively what was ‘undervalued’.
I am not a fundamental trader, and so I cannot be an arbiter of what is undervalued and what is not. I’ve tried it in the past, and I was woeful at it, so best not to look at me for guidance.
However, any stock that is big enough and well traded is probably OK – but I can’t say for sure.
The market is relatively predictable because it is what people think about ALL stocks. It is relatively unpredictable when we are talking about ONE stock.
Sorry can’t be more helpful!
h
Hi Heather, I am reading your Bull Market book and excited to buy 1 SPY option, but I am wondering if it is OK to buy right now (today or tomorrow) even though the golden cross happened so long ago? I understand the golden cross says be “in the market” but does that mean anytime after the golden cross and before the death cross is OK to purchase my 1 option no matter how extended the market is from the golden cross? Thanks!
Hi Amy
A lot of people are asking that question, you are not alone! Rght now the market is trending upwards, but we don’t know how long that trend will last – no-one does. It could be months or years; we just don’t know.
If we wait for it to end with a death cross, and then wait for another golden cross we could be in our dotage by the time that happens, so I would suggest that you get in now. Of course, the ITM results are taken from golden cross to death cross so we don’t know what your results are going to be, but bull markets tend to last a lot longer than bear markets.
If it is any comfort, I topped up a few of my positions in the dip on Monday so you are not alone!
Hope this helps.
h
I really like your blog! Fully aligned, can’t be convinced of holding on to a bull strategy during a bear market. I really like your approach.
The most painful part of ITM strategy is going in in a false signal, at 2x leverage since day 1. Have you thought of finetuning going in by steps instead of 2x at once to reduce the loss on false signals?
Hi Juan,
yes, the false signals are annoying. I’m sure that there is an additional signal that could reduce the probablility, I must keep looking for it!
Re legging in – I always get into my main positions right away (just my thing – whenever I wait the market takes off without me!) – but I also have 10 – 20% cash, which I use to top up positions if I think they are going the right way. But stepping in gradually may work for you, no reason not to do it.
Hope this helps
h
Heather,
I plan on being “first in line” for your new books (even though I have all of them in Kindle versions, I would definitely like to have print copies.
I love reading your work and appreciate the effort you put into the writings.
Let me know some of your favorite spots in Italy as my wife and I plan to go next year after retirement.
Thanks
Hey Steve – thank you!
And Italy – Tuscany & around San Gimignano is lovely (although getting a bit touristy) – steer clear of Firenze, Siena and some other hot spots, standing room only! But the countryside is lovely.
This year planning on saling from Greece to Brindisi then doing the south coast of Italy then on to Sicily, Sardinia and Corsica – will report back!
h