Is it a dead cat bounce?
Quick answer: no. I’ve been seeing the current rally called a dead cat bounce but, while it is an amusing term, that’s not really what is going on here. A dead cat bounce occurs after a precipitous fall, the theory being that even a dead cat will bounce when dropped from a sufficient height. We have not had the kind of falls like we had in the Covid bear or the GFC, so no, its not a dead cat bounce.
Death Cross
Last update I noted that there was a death cross but that it was not confirmed and suggested that since there were special circumstances (bank failures) that waiting until the dust settled was the wisest thing to do, and that that is what I personally was going to do. And I am glad that I did.
The death cross was not confirmed, instead the SMAs converged then drew away again, and this week the market went up 3.5%. Not earth shattering, but good news. As I say in the book, when the 200 days SMA is horizontal, ITM can whip us in and out of trades, so it is best to wait for a clear signal – which we now have.
Or a bull trap?
Possibly it could be a bull trap, so let’s look at the chart for clues. Firstly we are not out of the bear market; we have to get above $427.87 for that, and it is quite a bit above Friday’s close of $409. We need a rise of 4.5% from where we are now.
Another thing that is noticeable is that the downtrend is broken, and now appears to be providing support – notice how the price action bounced off in mid-March. I know that you can read into charts what you want to read into them, and possibly I am doing that, but have a look at the trading range since the low in October:
There is a trading channel within which SPY has been making higher highs and higher lows. That is a positive sign, but right now we are in the middle of the channel. Next week should give us some clues about what is happening and whether it is another bull trap or the start of the next bull market (Yes! Please!)
ITMS (ITM for Smaller Accounts)
Well, after more than a year of sitting on the sidelines we finally have signs of something happening. The chart shows a golden cross (woohoo!) although waiting another day or so for confirmation is a good idea. Hopefully the market is up on Monday which will give us the confirmation that we need. Now, what option to buy?
The longest dated SPYG options are September, which is 166 days away. The lowest strike is $30 which is slightly above half of the current SPYG price. The bid / ask is $25.60 / $26.20 which makes the effective price $55.60 / $56.20, or 0.4% / 1.5% away from the current price. If you get filled at the middle of the bid / ask, then this option should conform to the ITMS rules.
Remember, because options deal in parcels of 100 shares the total cost will be 100 times that, so your outlay will be approximately $2,540.
What about the rest of the market?
We’ve covered the 2 ETFs that ITM has been backtested on, but there are three more we should keep an eye on to make sure that we know what the market is doing: the Nasdaq (ETF: QQQ), gold (ETF: GLD) and the Volatility index (VIX).
Nasdaq (ETF: QQQ)
QQQ got its golden cross in February, a little later than SPY, because it had dropped further. It is now trading above the bear exit and looking quite healthy. ITM has not been backtested on QQQ but if someone wants to do the back testing and share their results that would be very much appreciated. Personally, I do trade QQQ using ITM, but I haven’t backtested it so I can’t tell you what results to expect. However, there are currently no red flags about its price action being different to SPY.
Gold (ETF: GLD)
Gold is always considered the ‘flight to safety’ but in the last few years it’s hard to reconcile that with its price action. In the weekly chart above you can see that is started a big run up at the start of 2019, a full year before the Covid bear started. Here they are graphed together:
What should we make of this? Not really trying to make a point here, just giving you some information. I dumped my GLD options last week when the gold price spiked over $2,000 – I wonder if I will regret that?
VIX (Volatility Index)
The volatility index is currently 18.70 and, as you know, anything less than 20 is considered a low volatility market. The last time it was over 30 was at the market lows last October. So no red flags from the VIX.
Covered Calls on SPY
I have been getting a lot of questions about writing covered calls on SPY, so I have moved some of my cash into SPY shares and checked out selling weekly covered calls against them. As usual, I conclude that its not worth it. I keep getting questions about why I don’t do it, and here’s why:
If I look to sell a week from today, then if I sell a call at current price +3% then I get the princely sum of $37. If I sell a call at +4% then I get $12. Let’s look at the total returns. Here’s a snapshot of 100 SPY shares:
I have circled the current market value of 100 SPY shares – that’s right, $40K. And I get a return of $12 (0.03% weekly, 1.5% annually) and risk missing out on a big market move? Nope, not for me! But maybe there is something that I’m not seeing – that may well be the case. If anyone can show me how to make it work I’m definitely listening!
So where is ITM now?
In the 2023 edition I have updated the backtesting to February 2023, and here is a graph of the results:
There’s no getting away from the fact that last year was awful, even if we were on the sidelines for most of the year, but if you take a long term view, we’re still doing OK. There has been a nasty downturn, lets not ignore that, I’m not hiding anything, that has never been my intention. But let’s hope the bull comes back! That was MUCH more fun.
Daytrading Experiment
Not good, huh? Pretty awful, actually. At this rate it may not be long before I blow up the entire account. Its happened before, no big deal. Tuition fees, remember?
Some of it can be excused by the TD365 platform being flaky and being unable to get out of losing trades (I have the live chat transcripts where I am pleasding with them to do something about it – maybe I should post them?) and there is a particular sort of pain watching your positions going down and down and not being able to get out of them.
Some of it was my own errors – like selling instead of buying to get out of a short position and doubling up my short position by mistake. Not smart. Mostly it was just getting it wrong. I’ve thought of a strategy of trading in the opposite direction to what I think. Maybe that’s the answer.
The experiment reminded me of a part in the Nicholas Darvas How I made $2,000,000 in the Stock Martket when after trading successfully from overseas for a few years he decided to trade from Wall St:
It was a period of complete disaster. I lost $100,000 in a few weeks. A detailed list of my trading at this time reads like a lunatic’s chronicle. I can still hardly believe it.
Yep, that is exactly what is happening to me! The whole chapter of his book (Chapter 9, My Second Crisis) is great reading and describes exactly what has happened to me!
ITMeter
Reader Q&A
I am afraid that I am rather behind with answering questions, so I have tried to cover some of the more frequent ones in the blog above. But here are some more:
SPYG is an ETF of the 300 growth stocks in the S&P 500. We are using it as a proxy to SPY as it is much cheaper, and so its options are also much cheaper making it suitable for smaller accounts. The strategy that uses it is called ITMS and is described in Chapter 11 of both the 2022 and 2023 editions of In The Money: Bull Market Strategy.
That is a worry – see question above. The SPYG strategy (IMS) is in both the 2022 and 2023 editions of In The Money: Bull Market Strategy. If you havent got that version the I advise to contact Amazon customer service and get them to give you the correct book.
Re the golden cross, I can’t see it on either SPY and SPYG on the 24th March. Are you using the 10 & 200 SMA’s ?
There was no reason, I just hadn’t go around to it. No ulterior motive. Apologies. All updated now.
The accepted thing to do is to deposit more funds, otherwise your broker can sell your positions without asking you, or even telling, you. I actually didn’t see the margin call emails until the next day by which time they had been resolved anyway by my closing all the positions.
Actually, not really. I am listening to his live trading at the start of the European market (1 – 2 hours) and often at the start of the US session, but I don’t do all his trades. Long complicated story why not, but my results are not the same as his results. His can be found on his website, everything is posted, you can see all the trades. Maybe I should do a blog article on it – yes, that’s a good idea. Will do it.
I am hopeful but like everyone else I don’t know. I think we have some positive signals, but whether it will follow through remains to be seen. I really hope so, I am fed up with sitting on the sidelines for most of the last year.
I have so many suggestions about replacements for SPYG – I am wondering why no-one likes SPYG? Has it a personality problem? What am I not getting? As mentioned above, I will try to review all of the alternatives and post next blog.
Reviews on Amazon
If you liked my books I would really appreciate a positive review on Amazon it doesn’t have to be long, 3 – 4 lines is fine. Here’s the link to my author page: Heather Cullen Amazon.
More reviews mean that I don’t have to pay Amazon quite so much just to get them to display the books, so it would be great if you could do a review, and for more than one book if possible.
I know how many people read the blog, and I like that so many of you read it and find it useful – actually, I am thrilled. I never knew there would be so many of you! (heart emoji here) But it takes a considerable time to set up and post and it is free, so if you could do a review in return that would be wonderful. Seriously, I would love it. Thank you.
What next?
Should be an interesting week. Right now, 6 hours to market open, the futures are mixed (Dow up slightly, S&P down slightly).
We deserve a nice rally leading to a new bull market. We really do!
Fingers crossed.
Heather
8 Responses
Heather,
Thanks for the quick response to my above question regarding the SPYG. I went through the ITMS chapter a little too fast. I know that you do a variety of trades and I tend to lean towards deep in the money leap calls on individual stocks. Assuming you take a position in an individual stocks or ETFs,(GLD for example) do you use the same purchase rules of ITM?
Hey Dan, I rarely take positions on individual stocks – have been burned too may times over the years!
I do play with GLD and QQQ, and probably have up to 5% of a portfolio on GLD, up to 25% on QQQ. I use the ITM rules for getting in and out of the market for all of them, and usually aim for 80 – 90% DITM (ITM rules), 10% ATM, sometimes 5% OTM – but of course thats just where you start, it changes as the market moves. I try to rebalance when they have moved.
It works well for me in a bull market, and I can hardly wait to be in one again – fed up with bears and uncertainty!
h
Hi Heather,
Enjoyed your books and enjoying your thoughts and analysis on your Blog. With respect to SPLG… I find it to be a Mirror Image of SPY and a more suitable ETF for the ITMS strategy. No need to back test it because it would have basically the same results as SPY.
The problem I find with SPYG is that at times it seems close to SPY when the rising tide is lifting all boats, but it diverges from SPY when Tech is either leading or lagging.
Plus, by using SPLG I would not have to chart two different ETFs because charting either SPY or SPLG is the same as charting the other.
The volume traded on both SPLG and SPYG are similar.
Options are available on SPYG only out to September 15, 2023.
On the other hand, options are available on SPLG out to March 15, 2024 with Strikes on dollar increments down to a 24 Strike… strikes are available for SPLG at 24, 25, 26, 27, etc.
However, the options on SPYG are limited in so far as once you get below the 40 Strike the next lowest is the 35 Strike, and then the 30 Strike.
I will be using SPLG in one of my daughter’s retirement account because the balance isn’t large enough yet to purchase more than one SPY option. In my humble opinion, it is my best choice for following the ITMS in her account.
Thought I would throw this word salad out for you.
Please keep up the good work. You are doing great.
Ray – thank you for this – I have approved it right way because I am sure that a lot of people will find it helpful!
I see I’m really going to have to do some homework!
But great info – thank you!
h
Heather, I have read the 3 in the money books. In your recent post you show a bear market line which is 20% lower that the recent high. You also show a bear exit line which i dont remember seeing in the books. What is the criteria for the bear exit line.
thanks
Del
Hi Del, the bear exit is 20% up from the low. I covered it in the last blog post (Caught in a bull trap?) under the heading of When do bear markets end?. Hope this helps. If it isn’t clear then get back to me.
Hi Heather. I love your books and blog! I’m responding to your question about writing covered calls on SPY. I have been doing it for 2 months (since just after the ITM buy signal) and generating significant income. I write them as a diagonal call spread, at a strike about 2+% above the current SPY price (I think you suggested that level in an earlier post). The option premiums have generally been over $1 — this week is lower, maybe because the market is closed for Good Friday. If you are long a 1/19/24 $250 Call (about $166 today), your ROI is about 0.6%/week, or 2.4%/month. I have been a little more aggressive and made about 11-12% for the last 2 months, until last week when the SPY spiked. I rolled them to this week and hope for a pullback. Let me know if you have questions. Scott
Hey Scott – thank you for that. Will check it out, and probably other readers will too. Thank you for sharing this info!
h