Goodbye to the Bear?

Heather Cullen

Heather Cullen

In The Money

Heather Cullen Blog goodbye to the Bear

Is it Goodbye to the Bear?

Well, what a week. Or rather, what a crazy couple of days. On Wednesday, SPY closed at $374.13 and on Friday it closed at $398.51 – a 6.5% jump in 2 days! Crazy. Not quite as crazy as the Nasdaq (QQQ) which jumped 9.4%. And SPY, after closing well below the Bear Threshold on Wednesday is now comfortably out of Bear territory, and back in Correction territory. Let’s have a look at the chart:

Heather Cullen Blog SPY

You can see the last 2 days have reversed the direction of the MACD histogram which was heading toward the midline, and possibly into negative territory. Not any more!

What caused the frenzy? Not the mid-terms, as the results for both the House and Congress are (at time of writing) still up in the air. The trigger was more likely to be the inflation data, which showed a decline. Consumer prices (YoY) dropped from 8.2% in September to 7.7% in October. This cheered up traders immensely, as they assumed that the Fed would not raise interest rates as fast as planned. Is it the start of a reduction in inflation? Here’s an interesting chart:

Heather Cullen Blog Inflation

You can see that other spending increases (Mar 21, Nov 21) have met with an increase in inflation. Why is this time different? I am not sure. In any case even the 7.7% is well above the Fed’s target of 2%, so maybe traders are being a little too optimistic.

Back to the SPY Chart

In any case, I am not an economist, so I can’t tell you what is going on. But, like everyone else, I can look at a chart and see if there are any clues. Sometimes, when poring over a chart, I feel like a haruspex, an official in ancient Rome who interpreted omens by inspecting the entrails of sacrificial animals. Don’t worry, I’ll get over it. Let’s look at the chart with the volume indicator:

Heather Cullen Blog

You can see that Thursday’s big move was on relatively high volume, but Friday’s smaller move was on only slightly above average volume. If we look at the 5-minute intraday chart we see that the biggest gain was on open on Thursday, when there was a gap up from 374 to 388.  

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There are no major clues here other than the rate of increase is slowing. So, let’s check another indicator.

Bollinger Bands

I have mentioned Bollinger Bands in the Compare Option Strategies book, but we’ll do a quick explanation here.  It is a momentum measure. The magenta (middle) line is a 20 day SMA, the blue line is 2 standard deviations above the SMA, and the green line 2 standard deviations below it. Regression towards the mean is the tendency for things to even out over time. In other words, large price increases tend not to stay there, and tend to reverse.

If you look at the chart above, you will see that whenever SPY hits the top Bollinger Band it tends to reverse – see Late March, early June, July to early August, and late October. We are there again – will it reverse? Or keep going up? You can see that sometimes it can stay on the upper band for several weeks, enough for a decent rally.

What about the Downtrend?

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I’ve drawn in the downtrend, the thick magenta line, which shows that the downtrend has not yet been broken. I’ve also drawn a bottom channel line, which is somewhat less convincing. Once the trend line is pierced, based on past performance, then it is likely that the trend will switch to an uptrend. That looks to be around the same time that we will get a bull signal – but this all depends on what happens over the next week or two. It is possible that we will be entering a new bull market – I absolutely hope so, but right now I don’t feel all that optimistic.

But what I feel doesn’t matter – the market does what the market does and it doesn’t care two hoots what I think!! The market will roll right over you, no matter how many people agree with you.

What should we be doing?

Sitting tight. Watching and waiting.

We are out of the market and waiting for the next signal – either bull or bear. If we get a signal before next blog post then I will do a special post here, but right now we are out on the sidelines.

I won’t email everyone, though – I have to be careful about SPAM and not giving financial advice as I am not a financial adviser.

Anyway I am sure everyone has more than enough emails without my adding to them!

Straddle or Strangle

On Tuesday I thought that because of the elections the market was going to make a big move but I wasn’t sure which way, so I investigated doing a straddle or a strangle. These are option strategies where you can benefit by a move in either direction, up or down. In both cases, you buy a call and a put option with the same expiration date.

  • A Strangle means your call and put have different strikes
  • A Straddle means your call and put have the same strike (ATM)
Heather Cullen Blog Straddle the Bull

I checked through the options chains for March 2023 as I was thinking of only staying in the trade for a few days. But I was sorely disappointed. Options were so expensive! I didn’t think I was going to mention it in the blog, so my notes are a bit sketchy when it comes to the strikes, but the one bit that is clear is the option cost and the payoff. The best I could come up with was:

  • Premium of $3,297 (15.06 call, 17.91 put) SPY would have to get outside the range 349 – 406 before it went into profit.
  • Premium of $2,667 – SPY would have to get outside the range 341 – 404 before it went into profit.

I decided against doing it, it seemed to be very unlikely to end in a big profit. As it turned out, the move was much larger than anyone expected and the trade may have gone into profit, but I have just looked at the futures and it doesn’t look like the uptrend is going to continue.

Why do I mention this as it’s not part of the ITM strategy? It’s not a secret that I keep a few ‘play’ accounts where I do stuff like this. Often, after a predictable move you think ‘I could have made money on that!’ but unless you check out your strategy and payoff before the move you are just guessing.

We can all be wonderful traders in hindsight!

Reader Q&A

Would it be OK in the future to put some kind of a color flag or box with some indication that for the purposes of your system, you are in or out?

A good suggestion, but I have to be careful. I mostly live in Australia where there are draconian penalties for anyone giving financial advice if you are not registered with the government as a financial adviser – which I am not and have no intention of doing.

I have to make sure that anything I say is ‘for educational purposes only’ and ‘does not construe financial advice’ so I am not sure if publishing an in/out indicator would contravene these nanny-state rules. Let me figure out what I can do that won’t violate all the rules.  

 From your book, where you are looking for the time (extrinsic) value of the contract to be less than 1% for the DITM strike, If you pick the 60%, with SPY at 380, the strike would be 228 and assuming the strike we pick is SPY 225, The 2024 Bid X Ask is 162.84 X 172.84 and Mid would be 167.84. For this strike, the time value is $12.84 and as you can, it is 3.37% of the SPY’s price at 380 and not within the 1% range the book mentioned. How do you manage this

Yes, this is a problem that we didn’t have when I originally published the first book. At the time SPY was trading at less than 330, and volatility was low, so options were cheap. The price of options increases with volatility., and right now we have high volatility.

I have just looked up the options chain after the 6.5% rise we have had in the last 2 days – and options are very expensive, I can see that! You can see how the current volatility is affecting the SPY option prices by looking at the blog post when SPY was much higher, trading at $458.70 but you could still get an ITM option for $12K.

So, to current figures: SPY is 398.51 (crazy – 2 days ago it was 374!) and we should be looking for an effective price of $402.50 (1% above). Looking at December 2023 (13 months away) the first one that matches that is a strike of $170 – but it costs $232, which means an outlay of $23K, way over the budget.

However, if you are following the ITM strategy, we are not in the market for buying options right now, so hopefully the volatility will calm down by that time.

The 2022 edition of ITM Bull book had a strategy for smaller accounts, using SPYG (S&P 500 Growth ETF). SPYG is currently trading at $54.05 and so the options are comparatively cheaper. You should be looking for an effective price less than $54.60. For example, a July 23 (the farthest out you can go) strike $30 (the lowest) has a bid / ask of 24.50/25.10 which meets the criteria (just!) and will cost $2,450 – $2,510.

Do you think that the next bull market has started?

I don’t know, it is too early to tell. This could be a sucker’s rally. This is what I think the bull market is doing right now:

Heather Cullen Blog Bull market

Your hand-written note from 10/26 blog post: does it say “what’s unusual” maybe?

Good guess – thank you Lucille – now if you can just let me know what it was that was unusual . . !

I know stop losses reduce gains but if you compare your leveraged portfolios of 1X to 2x to 3X with just investing less of your capital say 1/3 instead of 100% or to a stop loss of 10%, which among them is better i.e, safer?

Oooff! So complicated. Yes, I get that using one-third of your capital and doing a 3X leverage would be the same as using all your capital in a 1X leverage. Re: stop losses? I know they are touted as being safe, but I think that they ensure that you sell your position at exactly the worst time. I cover that in Chapter 2 of the Bull book, pages 50 – 53.

You mentioned in ITMB when discussing the backtesting that you could have used another indicator with the ITM backtest to greatly improve the returns. As far as I can tell, you didn’t say what that indicator was. Was it by chance the extra indicator added for ITMB? I’m curious, what would have been the results had you added it?

Hi In your books you mentioned few times about a second indicator to improve the ITM strategy are referring to the MACD histogram to be included with the SMA?

Yes. It was the MACD. I was testing various parameters for the MACD, but I am afraid I can’t remember which proved the most accurate and by how much. I have so many spreadsheets finding one that I decided not to pursue is too hard. But you can do the backtesting – see for a format you may wish to use.

Do you consider the present bear market for s&p at 384.98?

No, the Bear Threshold is 382.17. This is calculated by taking 80% of the most recent high of 477.71 on Jan 3 2023.

What's next . . .

I wish I knew! We could have either the bear signal or the bull signal by next scheduled blog post. If it comes in the next 2 weeks I will post here, but as I mentioned above I won’t send out a group email.

So here’s hoping for some action and happier times!


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