Is it a bear yet?
Not yet. SPY will have to drop to 362.40 before we are in a bear market, which is defined as a drop of 20% from recent highs. Right now, it is not even a correction which is a 10% drop. But we have dropped 5.3% since the recent high of 453.19 on 2 September and that has not been enjoyable at all. However, right now, even though it doesn’t feel like it, we are still in ‘normal’ territory.
You can see from the chart we dropped right through the 50 day SMA unlike all the other times this year when we bounced off. This is the first time this year that the 10 day SMA has death crossed the 50 day SMA and is heading for the 100 day SMA. Our ITM OUT signal is when the 10 SMA drops through the 200 SMA. If the drop continues at the same rate, then this may happen within a week or two.
Or not. We don’t know, nor does anyone else. The political situation does not look like it will be resolved in a hurry so we may be in for a few more nasty days.
Open Interest
I have had quite a few queries asking if it is OK to buy options with very little Open Interest (OI). The short answer is YES, with SPY it is perfectly OK. NYSE, and other stock exchanges, have market makers (liquidity providers) who must provide a buy and sell price in a tradeable asset. If you check the bid / ask for SPY options you see that there is a bid / ask for every strike, and that there is no difference between the spreads for strikes. Here is an example:
You can see that (predictably) the 400 strike has a high open interest (1,680) while the 399 and 401 strikes have very small OIs (12 and 2). The spreads are 1.01, 1.00 and 0.99 respectively, showing that OI does not affect the spread. There is no real advantage going for the ‘nice’ numbers like 350 or 400 other than it makes the math easier when you are calculating the effective price.
Bear Market Strategy
The ITM Bear Strategy book is on track for November publication, and hopefully we won’t be in a bear until then. The ITMB bear market strategy (ITMB for short) has been backtested for 25 years and is proving successful in meeting its requirements which are to:
- Start after the ITM OUT signal
- Easy IN, OUT and Back In signals
- Max 2 technical indicators
- More than 80% trades are profitable.
- Less than 20% trades are not profitable
- Lose a max of 5% on any losing trade.
Naturally, I would have liked to go for 100% profitable trades, but we live in the real world! If you have any feedback on these requirements then please let me know. Email me at Info@HeatherCullen.com or fill out a contact form. I would love to hear what you think and any suggestions.
Happy Trading
