Is it Dead Cat Bounce?
About time something changed. We needed a good week! It didn’t start well – in fact it started quite dramatically badly, but from open on Monday it went up 4.4%. to end slightly higher than last Friday’s close.
So, we are happy?
That’s not to say we are really happy with where we are. We’re not. We are still 5% below the high reached on 16th July. However, when you consider the shocks we have had during that time, Trump assassination attempt, Biden opting out, a global IT meltdown, Harris being anointed, Walz being chosen – well, I think it is quite amazing that that is all we are down.
Dead Cat Bounce
The question on everyone’s mind is, of course, is this a dead cat bounce?
For those of you not familiar with the term, it comes from the rather heartless observation that anything dropped from a sufficient height will bounce.
Why a dead cat? No idea. The term was first used by journalists in 1985 to describe the financial downturn in Singapore and Malaysia – maybe they don’t like cats there.
Anyway, is what we are seeing a dead cat bounce?
I don’t thing so, we are not talking about a sudden, significant drop. The market has been trending down for almost 4 weeks. It could, however, be a:
Bull Trap
A bull trap occurs when there is a downtrend that looks as though it has reversed its trend and is rising. If, after the initial rise, it continues to decline it is a bull trap, as it has trapped the bulls, traders who bought in expecting a bull trend.
Could this be one? It is possible. I am not convinced that a trend can be established in less than 4 weeks. It is more likely (I think) that this is a:
Bear Trap
Bear traps occur when an uptrend looks as though it is going to reverse, and traders sell or short on that basis. However, instead of continuing to decline, it reverses again and starts to rise trapping the bears.
Until mid-July we were in a nice steady uptrend that had been going on for eight months, with a wobble 3 months ago. There was a bear trap in April, and it is possible that this is another bear trap.
As with everything in the market we will only know for sure after it has happened.
Volatility
One thing that is noticeable this week was the spike in the VIX (volatility index). It reached 38, which is the highest level since 2020. The spike is not consistent with the drop, and I have been reading about why it reached such a high level, so I may do next week’s blog on volatility and its effect on option prices.
Nikkei 225 (Japan)
If you thought we had it tough last week, spare a thought for the poor Japanese. On Monday the Nikkei dropped over 13% (from 35,917 to 31,078), only to bounce back the next day with an 11.7% rise. (34,717). Now THAT’S volatility!
To the markets . . .
Last Monday was horrible. It’s one thing losing your own money, but I kept feeling sorry and guilty for all the people following ITM and possible losing hope. I really hope that no-one sold out at Monday’s bottom. We are still some way from a death cross. Let’s check the charts:
SPY Charts
I have gone a little further back than usual so that we can see last week in context. SPY is now at the same level as early June; the dip, while painful, was not really out of the ordinary. The drop from the high of 16th July (564.36) to the low of 5th August (517.38) was 8.3%, a serious dip but not into correction territory (10% – 20%). We are back at 532.99, a drop of 5.6% from July’s high.
It is worth looking at the volumes. We have had below average volume for months, indicating that there are a lot of people sitting on the sidelines, but you can see the surge in volume on Monday. It was the highest volume day since March 2023.
Looking at the long term chart we see that it has fallen back to the uptrend, very similar to April’s pattern.
SPYG Charts
SPYG has fared badly due to the dip being greatest in technology stocks. From a top of 84.1 on the 10th July it dropped 12.7% to 73.38 on Monday, pushing it into correction territory. It has recovered to 76.24, just above the correction threshold.
And on the long term chart we see that it did, indeed, return to test the resistance level from 2021 as support.
QQQ Charts
QQQ has suffered badly; it dropped right into correction territory. From its high on 10th July (502.96) on Monday it dropped 13.4% to 435.37. It is now at 450.41, not quite out of correction territory. It is now trading just above the Feb – April trading range.
On the long term chart, we see that it hasn’t fallen back to support at the highs of December 2021. OptionGear (the package I use for charts) is suddenly refusing to let me draw in lines or text, so you will have to work them out for yourself. It is annoyingly temperamental and for $50 a month I expect better! Are you listening Hubb?
VIX Chart
The VIX chart is very interesting. You can see that the volatility spiked to its highest level since 2020.
ITMeter
The week ahead - and longer
In the face of the current uncertainty, I am amazed at the market’s resilience. With serious international problems on several fronts to have a vacuum in the White House is an enormous danger and I am surprised the market is not reflecting thi – so far anyway. Scott Grannis (Calafia beach pundit) put it this way:
One way to make sense of all this is to conclude that the market is looking across the valley of despair to better times ahead.
Of course, when he wrote that Biden was still running and almost certain to lose, and a Trump victory was widely expected. Now, with Harris / Walz apparently more popular, the ‘better times ahead’ seems less certain.
If they win, then I fear that next year we will have a rerun of the Biden bear. If a bear happens, we will be out of the market, missing the opportunities to make money. If it is like the last bear (long and shallow) there may not be opportunities to do bear trades.
However, we will keep to our strategy. This week there are no major earnings reports (the next big one will be NVIDIA on the 28th August) but there is more CPI data on Wednesday. A rate cut in September is almost a certainty, the debate now is whether it will be 25 or 50 basis points.
Futures
Right now, 12 hours to market open, the futures seem pretty neutral. OK, maybe slightly positive, but it is a while until market open and anything can happen! Interesting to see that the VIX is now under 20, so technically we are in a low-volatility environment.
Bye to Summer in Europe
Well, all good things etc. But after a foray into Rome on Tuesday I am convinced that my strategy of staying out of major cities is a good idea. It was hot and humid, packed with tourists, all following their tour leaders who were holding up various toys or umbrellas so that they knew who to follow. It was hell on wheels!
But here is the obligatory shot of the Colosseum (it was hard to get a shot that wasn’t full of people) and then on the way back, flying over Sicily. Stromboli was still smoking, and that plume of cloud is Etna. The good bit? Not having to do the blog on a laptop!
Fingers crossed for a good week!
Heather
32 thoughts on “Dead Cat Bounce?”
I’ve been following your “Bull Market In the Money” strategy and appreciate your insights on leveraging deep in-the-money calls during strong uptrends. I understand that this strategy is typically applied to stocks in a bullish environment, but I’m curious about its potential application to other assets.
Specifically, I’m wondering if this strategy could be effectively used on TLT (iShares 20+ Year Treasury Bond ETF). Looking at a chart of TLT now, it would appear as if a “buy” signal happened in mid-June, but it is just starting to take off. I’m interested in your thoughts on this.
Thank you for your time, and I look forward to your insight!
Pat
I’m 95% done with the “In the Money – Bull Market” book. I like it a lot. I worked for years as a software engineer at a proprietary options trading firm. You do a great job of explaining a fairly difficult topic. In any case, I have a couple of questions about the ‘strategy’,
Does a qualifying ‘cross’ require the .3% CLOSE above the moving average cross or just a .3% above trade? If the former (which I imagine it is), does your strategy make the option trade at the next day’s open. If so, what if at the next day open, SPY is no longer sufficiently above the cross?
Also, there aren’t that many “Golden Crosses” and I suspect the next one will not occur for quite some time. Do you think it makes sense to enter the strategy now or would you recommend waiting until the next “Golden Cross”?
Jeff
Hi Heather
I read your book yesterday. Congratulations. It is very well written and interesting so I could read it in one day.
I have seen some strategies that trade SPY with risk on and risk off parameters. Yours really makes sense.
Can you tell me about the maximum drawdown you found on your backtest?
Since you use leverage (in a healthy way, but still leverage) this is an issue for me to understand.
Thank you
Morris
Your books are amazing – finally something coherent to follow rather than the whipsaw chatter of opinions on CNBC!
Blake
Hi Blake – thank you – although you must admit that they are fun to listen to if you don’t take them seriously! I love it when the headline articles in Bloomberg or investing.com contradict each other – happens very often, and reminds you that they really don’t know what is going to happen.
h
Hi Heather, I have a question regarding your book In the Money: Bear market strategy. On page 111 you have examples of put option pricing which have me confused. Its written that SPY is trading at 461.90. Put option has 700 strike price and costs 187.71. Effective price then is 512.29. This I understand but what confuses me is where it says the effective price of 512.29 is 2.542 or .49% from current price. Wouldn’t it be 50.39 from current price which would not meet itmb criteria? Please clarify. Thank you.
Peter
Hi Peter – I have to go back and look at the modelling and the snapshots – and I don’t have time right now. I should later in the week, I will update this answer then.
h
Hi Heather, thank you for all the content and for the wonderful book. I just finished reading ITM: Bull and am working on applying for options trading through Schwab and have a question on the strategy level. There are 4 options to choose from: Covered, Longs, Spreads, and Short Uncovered. I am pretty sure the Logs strategy is the one I need for the DITM strategy, but wanted to see if you could confirm?
Steven
HI Steven. I also use SChwab for a couple of accounts. I am annoyed at them because they discontinued Streetsmart Central which I thought was excellent – now it is Thinkorswim which I don’t like as much.
Yes, you need the Level 1 Approval to do ITM – here’s the info from their website:
Level 0
Level 0 can be used to sell cash-secured equity puts, covered and protective strategies, enabling you to generate income or hedge positions.
Covered Calls
Covered Puts
Protective Puts
Protective Calls
Long Collars
Short Collars
Cash Secured Equity Puts
Level 1
Level 1 can be used for long options to take advantage of speculative directional opportunities. All of level 0, plus:
Long calls
Long puts
Long straddles
Long strangles
Hope this helps
h
Hello Heather, I hope you’re doing well. I’ve bought and read both your 2024 Bull and Bear strategy books and I’ve learned so much. Do you recommend this strategy with SPY or SPYG? Also, since I’m based in Canada, would you happen to know if it’s better to go with a Canadian-listed S&P500 ETF? Looking forward to hearing from you. Thanks, Ather
Hi Ather
If your account is big enough then I would go with SPY – thats what you are aiming at. SPY options are much more expensive that SPYG options (because SPY is more expensve than SPYG). ITMS (smaller accounts) was for people starting out with smaller accounts so that they could get into the market and not have to wait until they could afford SPY.
Re the Canadian ETF – ITM has not been tested on it so I have no idea what the results would be. I recommend that you use the US SPY.
Hope this helps
h
I saw this and somehow I missed lazy ITM versus Turbo ITM. Where’s this written up? Thanks, Bob
Hi Bob, the lazy and turbo ITMs were in the first version of the book – and seemed like a good idea until there were lots of people following it who had all started at different time and bought different options, so when I updated the book I didn’t use them again.
The same strategies are now the 50% and 60% strikes, and the additional strategies are buying SPYG / OTM / SPY shares with any spare cash. The results in the book do not include these so they are an underestimate of what the results could be.
Hope this explains it.
h
Wow what a start to the week!
I concur with your warning of caution and to keep an eye for a death cross, I would be surprised to see one this week. The 10 is still far away from the 200 so unless the market absolutely craters, it will be sometime after this week(who knows when).
One thing is for sure, for me at least, I am handling this crash/correction much better mentally than the Covid crash when I didn’t have much of a plan.
I’m thankful for your book as it gave me a good framework to work out of. Also knowing it’s historical performance through the thick and thin of different market turmoils of the past.
In some ways I’m excited to see this breakdown because for the first time I’ll get to see how this plays out in real time, not just how it was in the rear view mirror.
It may be ugly, but I at least have a rock of reason to brace myself on.
Stay safe out there!
Allan
Hi Allan,
yes it was unlikely that we were going to see a death cross last week, but as I was going to be unable to do anything on the blog or by email (travelling and flights) I wanted to alert people that they had to look out for themselves – just in case.
Y&es, it is good t have a framework / strategy. You know that if you follow it you are going to be spared the worst of any big downturns and that it wins big time in the long run. That doesn’t make any downturns more pleasant – but they ae part of a traders life so we have to be able to handle them without going completely insane!
Ad since the low of 6th August things have started to look better (tempting fate here!)
h
It’s gone from a trending to a ranging stock market… the unusual top configuration – was maybe the ( top for awhile ) until she starts trending again. I’m sure you know how to protect your position…
( as an optioneer – no pun intended ).
That’s what ( in my humble opinion ) I think your next book should be…
Randy
Oops, this one is also a duplicate, I must have really stuffed something up.
Answer below (I think!)
h
Hi Randy, when you wrote this the market was just about to do the big Monday 6th drop (yes, I am way behind on replying to comments) since then it has recovered. Re protecting your position – I have a bigger than usual percentage in straight SPY / QQQ stocks simply ecause I am twitchy about what is happening politics-wise. As I recommended in the book – remove some leverage when you wouldn’t be able to deal with the possible losses. But – am in no way any sort of expert at this . . . so couldn’t possibly write a book on this subject with any authority!
h
Hi, Heather!
In the past, you have alluded that you have both ITM and individual shares. I’m wondering if you would be willing to share a rough breakdown of your portfolio allocation between ITM and other investments? Not amounts, of course, but maybe approximate percentages? Thanks for your consideration!
Eric
Hi Eric
I don’t do individual shares (well, practically never – I flutter from time to time and I always get my come-uppance – this is the position as of today of some AMZN I bought on a whim: AMZN 11/15/2024 200. Cost: $2,351 Market value: $569. The market teaches me a lesson every time!)
I really stick to SPY and QQQ, some shares, some ITM and a small percentage (<5%) half each ATM and OTM. Until yesterday it was 80% ITM strategy & 15% shares, but last night I moved some more to shares as I wanted to reduce exposure to volatility. I explain that in the bull book Ch 11 in the section 'Sleeping at night'.
Hope this helps.
h
How aggressive and how much protection do you use (the larger account size the larger the protection )…
Randy
HI Randy – I have 3 main trading accounts I monitor daily (and WAY to many other little ones I keep forgetting about!) and in the biggest I mainly have SPY / QQQ shares (around 50%) DITM around 45% and AYM / OTM 5%. (Obviously the percentages change as the market changes but this is where I try to get back to). In the 2 smaller accounts I have a greater percentage of DITM / ATM / OTM and no shares at all. The percentages change all the time (depending on what I am testing out) and of course they have suffered badly in the recent downturn.
But such is life; I knew the dangers.
The reason I have a large percentage of shares in the big one is simply taking away some of the exposure to the current volatility. As this is my only source of income I have to protect the capital.
Hope this helps.
h
Has your book “In the Money, Bull Market” been updated as of 2024? I was looking on Amazon and 2024 is on the cover display but the publication date still says 2020.
Kapi
HI Kapi – yes the book has beenupdated to 2024. You can see this by looking at the copyright page which will say 2024.
The 202 publication date was when it was first published.
Hope this helps
h
Heather,
Thank you for your hard work and hours you must spend putting this together.
I for one; and I’m sure many others truly appreciate your dedication and talent!
Thank you again.
Andrew Sansone
Hi Andrew – how nice of you to take the time to send this.
I really, truly appreciate it – you have no idea how it bucks me up!
Thank you so much!
h
Haven’t heard the dead cat bounce saying in awhile. lol. On 7/11/2024 the large red candle engulfed the previous day candle… In my gut feeling I felt like a bout of profit taking was going to happen but was completely caught up in the next few days trading higher – There’s fear of the market tanking and there’s fear that the market is moving higher without me. That’s how I felt after NVDA split – the fear of NVDA talking off without me. My personal opinion ( and that’s all I have ) is the market isn’t finished trending higher. The proverbial wall of worry?
Now that you’re back home I’m curious on what your next project will be…
R
HI Randy – yes, I saw the large red engulfing candle on the 7th, and was a bit worried – like you I was telling myself it was people who were glad the market had bounced a bit but didn’t expect it to last so were getting out. And that seems a reasonable explanatiopn given that the next 4 days were up days.
I, too, think that market will get back to the July highs – but that is just a guess, the thing that worries me is the political situation, plus the international one. The market is skittish, and thats not very comfortable. It seems to be looking for bad news.
Next project – well, I have a whiteboard in my office covered with ideas – the job now is to decide on just 1 or 2 . . . I
h
Do you only look at the VIX during market hours? It was around 65 before the open on Monday.
Wow! I didn’t see that. Normally I would have but I was travelling from Sardinia to Rome to Australia last week so was out of range for a lot of the time.
I did read a couple of articles on why the spike was so big – and I did see a reference to over 60, but thought they must be wrong because that is up at covide levels!
So you noticed something historic – well done!
h
Hi Heather,
I really appreciate your insight and your blog! I only purchased your books just after Christmas, and have started giving them away as birthday gifts.
When you discuss volatility, I would be interested if, historically speaking, there is a better month or months for purchasing SPY options due to low volatility. Also, how much would that save versus high volatility periods?
Many thanks!
Brent
Fountain Hills, Arizona
Hi Brent
I actually don’t know – it is something I haven’t considered. But my initial reaction is that it is probable quite a small effect compared with normal price movements. High volatility that has a big effect on option prices seems to be quite rare – although we’ve just seen a volatility crush over the last few days and it is somethin I am planning on doing the next blog on.
So, basically, I don’t know but I don’t think it would be a viable strategy.
Hope this helps.
h
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