Bear With Me?
It’s rather uncanny. I was wandering through Biarritz (France) last week, pondering on the 2% drop in the Nasdaq and whether I should be worried, when I felt I was being watched.
I looked up – and, yes, there was a big brown bear glaring down at me!
I’ve no idea why he was there, but what a coincidence. Together with my GPS continually reminding me to ‘bear right’ and ‘bear left’, I feel as though I can’t get away from bears.
But spooky portents aside, what is happening on the markets? The last 2 days have been pretty horrid.
Should we worry? Let’s look at the charts.
SPY Chart
Thursday last week was nasty, and Friday not much better. On Wednesday there had been an interesting candle – a doji, which often appears at the top of an uptrend before reversal. But should we have acted on it?
Not really; yes it heralded a downturn, but lots of dojis don’t – you can see that there was one the Friday before in the same position, and after that the market climbed for 3 days. So, no, it would not have been a good idea.
Should we be taking any action? Not right now. The 10 SMA is comfortably above the 200 SMA and some reversion towards the mean is to be expected. We also have to remember that last Friday was also option expiry day when there is increased turnover often resulting in a down day.
Which is an idea I must checkout when I am back and am not on holiday and not working on a laptop in a chateau in the country with a flaky internet connection; maybe there’s a trading opportunity there.
SPYG Chart
SPYG is very much following the pattern of SPY, so all the comments on SPY are relevant here also.
QQQ Chart
I know that QQQ (the Nasdaq ETF) is not part of the ITM strategy, but it is good to keep an eye on it, especially as most of the stocks in it are also in SPY.
QQQ is following the SPY pattern, but on steroids! The drops were much bigger (from memory 2.08% last Thursday) but is has also risen higher from its lows, and in general tends to be more volatile.
Keeping things in perspective
I was reading a financial article the other day, which was warning people to get out of the market, because it had risen so much that a crash was inevitable. It was taking as its starting point October last year, which we all know was the lowest point of the bear market. It showed a lot of graphs starting from the same period, and compared them with similar periods in the past. They all looked scary. Except for the fact that . .
. . . in this case the market was not at an all time high. If you look at the weekly chart you can see that it has not yet reached its previous highs. So we have a way to go to take out the previous high from January 2022.
ITMeter
Summer is almost over . .
. . . and my holiday must end soon. Last year I took 100 days, but decided that Europe in August was just too crowded to be fun, plus it started to look like autumn, so this year I am returning to Australia in early August.
Today I left Biarritz heading back towards Nice (where I fly out). Biarritz was lovely, but lots of people. Now I am in a chateau in the country and it is beautifully quiet and peaceful – and the pool is 28C. Perfect!
If you want to see more here’s a link: Facebook Heather Cullen.
And the next 2 weeks . . .
My guess is that the market will consolidate for a while – but its just a guess. We’ll have to watch and see!
Heather
8 Responses
(From contact form)
What happens if you go out approximately 365 days and pick an option for the SPY at 60% of current price and you can’t find an effective price that is within the 1% of the SPY ETF price?
Hi Richard
This is the question du jour!
The two earlier post comments are about the same subjecy, please check them and get back to me if they dont make sense.
h
(From contact form)
Do you show the current return for your strategy anywhere?
Hi
The backtesting gives the results for the last 30 years, along with all the trades. Here’s the link: https://heathercullen.com/backtesting/
Of course, most people haven’t been doing it for 30 years, so it all depends on when you started following the ITM method.
What I am planning on doing in the next blog is to look at the return to date assuming that we had got in on the ITM publication date. I can’t use my own accounts as a guide as I am always trying different things as well as using ITM.
So check back in a couple of weeks – alternatively, you can step through the charts using the IN / Out rules and work it out that way.
Hope this helps.
h
(From contact form)
I read all three books by you and am very much impressed. Thanks for writing such great books. I found however that there are no contracts available for SPY meeting the requirement of the effective price being within 1% of current price, even at the lowest available strike price. Any inputs will be highly appreciated. This is the first time I will be trying this strategy. Thanks for your time and regards, JR
Hi JR – this is a problem right now – have just answered it in the previous comment – if that isnt clear please get back to me.
h
Hi Heather, I just finished reading In the Money, Bull & Bear and Compare Options Strategies. I am totally new to options Loved Bull & Bear, very easy to understand. I was lost with Compare Strategies, to complicated. My question is with the bull market strategy. All of the parameters seem to be met currently, but what I go to options chain about 1 year out and look at DITM strikes 60% of current price, I can’t find a option that falls within the 1% criteria. What should I do? Wait? Thank you sorry for the long post.
Rich Conklin
Hi Rich (great name!)
yes, this is a problem as options are expensive at the moment. But we can look for the best solution we can find because the ITM strategy tells us we should be in a bull trade. Today – right now – SPY is trading at $455.86. One % above this is $460.42 so we are looking for an option with an effective price (i.e. the strike + the cost of the option) less than this.
The first thing that can be done is to look at a closer-term option – so March 24 intead of June 24. The $220 strike is 240.69/241.77 (bid / ask) so will be just over the effective price we want. But the problem is, of course, that this is giving us less than 50% leverage. At 60% leverage ($273, so $270 strike) we get an effective price of $462.94 / $463.98. This is above the 1% rule, but fits the other criteria.
Now it comes down to individual choice: the $220 strike is less leveraged but also less risky – the $270 more leveraged and hence more risky. It really depends on which one suits yo’
ur risk tolerance.
Personally, I would go for the $270. It is DITM with around 1.5% time value, but really up to you.
The fact that options are so expensive right now is annoying – I will cover it in a further blog post.
Hope that helps