Bad News For Bulls

Heather Cullen

Heather Cullen

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In The Money

Heather Cullen Blog Bad News for Bulls

Bad News For Bulls

What a year! Looking back at the blog post this time last year, we were looking at the ‘Santa Rally’ to see if it was a real thing. Let’s recap:


Technically, the Santa Rally happens in the last 5 trading days of the year plus the first 2 trading days of the new year. So, checking back over the last 20 years, here are the results:

I pointed out that a swing of 1.59% was hardly significant, and it’s even less significant now given the wild swings we’ve endured this year (2022). As it turned out, the figure for the 2021 Santa Rally was positive, an increase of 1.16% from $472.06 to $477.55.

While the increase was not worth mentioning, the figures are interesting: SPY was trading at $477.55! Today, almost a year later, SPY is $393.18, a decrease of 17.7%.

Is there going to be a Santa Rally this year? Who knows? I don’t. But I’m not holding my breath.

The January Effect

J.P.Morgan, Jan 2, 2022: We still expect a boost from the January effect.

So how did they go? Red faces, I expect. On January 3, the first trading day of 2022 SPY was $477.71, the peak of the market. On January 31 it closed at $449.91, a drop of 5.8% for the  month. Mr Market does what he wants, no matter what the experts say! Here’s the updated graph:

Heather Cullen Blog January Effect

Over the last 23 years since 2000, I certainly can’t see any January effect: 12 decreases, 10 increases and one neutral. No, I don’t think the January Effect is a thing.

Sell in May and Go Away

I’ve been asked about this saying as well. It is often quoted, again without much in the way of supporting evidence. This quote is often attributed to Wall St, but it actually came from London around 200 years ago. The full quote is:  

Sell in May and go away, come back on St. Leger’s Day

It probably has less to do with the performance of the stock market and more to do with wealthy stockbrokers wanting to escape London in the summer and go to relax and shoot on their country estates. St Legers refers to a horse race at Doncaster run in early September.

If you had been following this advice it would have got you back into the market just in time for three worst days in the history of the stock market which all occurred during October!

Heather Cullen Blog Bear Market

ITM – Where Are We Now?

Still on the sidelines. No golden cross, no descent into bear territory. The last blog post had an image of a bull in a trap (which was what I was thinking was happening) and I wrote:

The golden cross has not eventuated, and I now wonder if it is going to happen any time soon. While the chart looks as though it is closing on the golden cross, other indicators are showing a different story.

 I noted that the three previous rallies had run out of steam and become bull traps, and that the current rally was exhibiting the same lack of conviction as the others. It looks as though that was the right call. If you look at the chart below you will see that the downtrend (dashed purple line) is still intact and the 200 SMA is following it.

Heather Cullen Blog SPY Chart

In bad news for the bulls, it looks like we are closing in on a 10/20 death cross, the MACD histogram has turned negative, but we are not yet in bear territory. It certainly looks as though we are heading that way, with SPY exhibiting lower highs and lower lows.

The SPY Downtrend

The downtrend line is uncannily accurate – look how exact it is. I’ve included a line chart so that you can see more clearly. Three times this year, SPY has precisely bounced off it.

Heather Cullen Blog SPY Downtrend

I am constantly amazed at how things like this work so well. Of course, what we want to know is how long it is going to go on for – but we don’t. Only Mr Market knows! But trends always follow the line of least resistance – that is, until they don’t.

The Barometer

I tidied up the barometer – what do you think?

Heather Cullen Blog Market Barometer

Fame But No Fortune

I’ve been working on a series of books, short reads, around one hour each, on specific stock market topics. I have two almost ready to publish and one of them has a fair bit of backtesting. I was wondering if any readers would care to review my backtesting and check for mistakes? There will be no fee involved, but I will be very grateful and recognize you in a special acknowledgment page in the published book.

If you are interested then please email me at info@HeatherCullen.com and put Backtesting Check in the subject line.

Blog Comments Enabled

I have enabled comments at the bottom of this post. I was thinking that it might be good to get some cross-fertilisation of ideas and views since we are now approaching 1,000 active readers. So feel free to leave a comment or question.

I have put on the moderation flag, because I don’t want little Natasha to keep telling me that she cooks well and wants to marry a nice man (that’s the printable bit!)

Reader Q&A

Questions this week from Bill, Eric, Gerhard, Juan, Ron and John.

1 – Are options getting more expensive? Calls at ~60% strike and ~1 year expiry have effective prices always >2% above current SPY asking price. . Apart from losing it all in a freak market crash, do you see any down side to going deeper in the money to get closer to a <1% effective price difference?

Yes, options ARE getting more expensive, partly because of the volatility and partly because SPY has increased a lot since I published the first book. Looking at today’s options chain, with SPY trading at $393.28 we are looking for an effective price 1% above, which is $397.21. You have to go right down to a $200 strike before you reach that. The bid / ask is $197.31/200.42, or in other words you will need to around $20K to get into this trade.

Re going deeper in the money, that is fine, the deeper you go the less leverage so the less you can lose (and gain), but with a $200 strike you are still approximately doubling the market returns.

2 – My question is buying an option on VTI ?, it’s much more affordable than SPY or QQQ, have you done any backtesting ?, do you have any thoughts or opinions on VTI as a more affordable choice?

VTI is the Vanguard Total Stockmarket ETF, and tracks the CRSP US Total Market Index rather than the S&P 500. This means that it tracks thousands of stocks rather than the 500 that make up the S&P. The allocation is:

     VTI: 71.7% large cap / 18.9% mid cap / 8.26% small cap

     SPY: 84.3% large cap / 15.5% midcap / 0.1$ small cap

Naturally, they hold most of the same large caps and mid caps, so they mirror each other’s performance to a large extent. With SPY trading at $393 and VTI trading at $197 the options should be around half the price.

I have had a look at the option chain, and while not giving you the choice of strikes or expiries that SPY has, the bid/ask spreads are not too large. For example, Jan 2024 ATM strike is $23.10/$23.90 a spread of 3.5%, whereas an ATM on SPY has a spread of 1.6%.

Clearly, the options are not traded anywhere nearly as much as SPY (looking at the OI (Open Interest)) but it is an interesting idea, and something worth having a look at. I have not done any backtesting on it (and to be frank right at the moment I am fed up with back testing!) but if anyone wants to do the backtesting would be very interested in the results!

3 – I wonder what do you think about selling call options against the DITM long contracts we have? I’d aim for around 1% monthly return on the short calls per contract, and as we are leveraged around 2:1 by being long on calls instead of stocks, we’d get around 2% additional monthly income. I’d like to know your opinion on this if I’m willing to be a little more “hands-on” with my strategy.

Yes, it is something that can be done – you just have to check whether it is worth it. Every time I look at selling weekly options I decide it’s not worth the risk of missing out on a large upward move.

Looking at today’s options chain for 1 week away, if I go to a strike of +5% then I will get a premium of  $41. If I go to 28 days away then I get a premium of $168 – but the chances of SPY moving more than 5% in  a month are quite high, so is it worth it? However, if you want to be really hands on then go for it, remembering that the more short term the better for you, you want to be where time decay is largest.

I’ve also covered it in previous blog posts: Are Covered Calls Worth It? and Covered Calls Revisited.

4 – Why don’t you use the CBOE VIX with the SPY to analyze Bull/Bear market in your blog as the CBOE VIX is for the most part inversely related to the SPY and therefor can give value-added information in this regard?

I always keep an eye on the VIX, but I have never found it to be helpful as a predictive tool – it usually just confirms my perception that the market is being unpredictable and making options expensive. But if you have some insight into how it could be used I am very happy to listen!

5 – I would like to know how to define a recent high. do we take the high over the past ‘x’ months or use another metric like trailing 52 week high as reference.

The most recent high would be the one before we started a downward trend, and for this year it was at the start of January. Since then, it hasn’t reversed the downward trend, apart from some bull traps, so that still stands as the most recent high. If SPY increased by more than 20% then this would be the definition of the end of the bear market and any high would then be the most recent high.

As with most things in the market everything is easy to see in hindsight, but right now I would say that the January high of $477 was the most recent high.

6. I take it you have concluded that David Alan Carter is wrong when he states that trading the golden cross/ death cross doesn’t work (the 12% Solution). 

Oof, haven’t read it yet! It’s on my list now!

7. I’ve looked into Olive Invest  which is interesting. I recommend that you take a look at it. It is different than the typical options calculator because it creates specific option strategies for you.

I’ve had a look at Olive Invest, and think that it is recommending very risky strategies, basically selling short-term naked puts. For example, here is their most recommended trade  

When you click on it here is the recommendation:

You can see that it involves selling 3 puts and buying 2 puts – which means that you are capping your losses on 2 of the puts you are selling, but one of them is opening you up to unlimited losses. The stock is Nordstrom, and you can see it is in a long term downtrend.

Heather Cullen Blog Nordstrom Chart

The trade relies on it not falling below the red line, and certainly not the blue line, before hitting the green line, the expiry date on 13 Jan 2023.

Here is the trade ticket for this trade:

Heather Cullen Blog Nordstrom Trade ticket

In other words it is a credit spread and you get a premium of $61. The payoff is:

Heather Cullen Blog Nordstrom Probability

In other words, if JWN stays above $14.50 you get to keep your $61. If it drops below that, then two of the puts you sold are protectd by your having bought the $13 put (meaning that you only lose $1.50 * 100 for each option) but the other put is unprotected and hence opening you up to a possible loss of $14.50 * 100, or $1,450. That’s an asymmetric trade, and not in a good way!

The recommendation is, as always, only play with short term OTM options with play money, and be prepared to lose it.

So still watching and waiting . . .

But if there is any change in status I will post here. And please feel free to leave a comment!

Images from Pixabay and Pexels.

Heather Cullen

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