Stock Market? Or Casino?
People who don’t trade the stock market – and lots who do – tend to view the stock market as a giant casino where you bet on your favorites and hope they win. ETFs have provided a safer choice for people who wanted to participate in a rising stock market but didn’t want to be in the business of choosing individual stocks and hoping for the best.
ETFs
ETFs have become extremely popular, with around 20% of market volume and 33% of the total dollar volume each day. Now, with over 3,000 listed ETFs covering every imaginable asset class and sector they are in danger of becoming as risky as the stocks they are replacing. I talked about 2X and 3X funds in my books, but now there is a new kid on the block – the first listed 4X ETF.
The new 4X ETF
The latest addition to the rather crowded ETF stable is XXXX (a dubious name, but memorable I suppose) and it is based on QQQ the Nasdaq 100. I was alerted to it by one of my readers, George (thank you!).
I have often warned about leveraged ETFs as they don’t do what most people think that they do, and have examples in my books of how they can magnify your losses. I wondered – how would XXXX have handled the Covid bear market?
I assumed that it would have been gone to zero– after all, if the market dropped 33% from top to bottom both the 3X and 4X ETFs should have been wiped out, surely? So, I set to work. (Yes, very nerdy) The results surprised me. Here they are:
As you can see, they certainly magnified the losses but weren’t completely wiped out. Am I recommending leveraged ETFs? Definitely not. Just showing that they are unpredictable and not suitable for anything other than day trading.
Getting the hang of this Dall-E AI image generator. I tried 6 times to get 4 bulls and 4 bears on each side but it was beyond it. I gave the same instructions to Bing and got smacked on the wrist with this message: I’m sorry, but I am not able to create images of that nature. Ooops.
Abject apology
It was pointed out to me that in last week’s blog about Harry Dent I had unfairly maligned one Kevin O’Leary. I had seen the video of Dent on the news a few days before, so googled it and snapshotted the talking head, not noticing it wasn’t actually him but someone talking about him. I then snapshotted the right guy (Harry Dent) and fixed the blog. Sorry to Mr O’Leary.
To the markets . . .
And a much better week after the dismal trading of last week. We’re back at a very exciting level. Let’s have a look.
SPY Chart
We are hitting an interesting level, where we found resistance in late December. We are back over the 10 day SMA which is good, now we are hoping that we will have enough momentum to start making new highs. We didn’t get down to see if there was support at $458, but that’s a good thing!
I have drawn in a tentative uptrend. As I discuss in my latest book, Reading Stock Charts, trend lines are subjective indicators. Yes, there are rules, but how you apply the rules is very subjective. Technically this isn’t yet a trend line; it has to have 3 points of contact, and this only has 2. Subjectivity comes in when you choose your starting point. I chose 14th November because there were 2 significant signals on the chart that day:
- It bounced up through support / resistance. (bottom green dashes)
- It broke the downtrend. (lighter blue dashes)
It may prove right it may not. We will have to wait for another time when it bounces off it before it is confirmed, but we can use it as a guide in the meantime. So let’s put things in perspective. Here’s the SPY chart since the start of 2021:
On this chart it looks like we have already broken through resistance. How can this be? We know that SPY previously reached $479 and we are not there yet. The chart must be wrong!
Think about it. This is a weekly chart, and the close is the weekly close, which will not be the same as the daily close unless the high of the week is on a Friday. Which one will prove to be a better predictor? We’ll have to wait and see.
SPYG Chart
Just like SPY it is bumping up against the highs of late December which may prove to be resistance. Unlike SPY, it retraced to the previous support / resistance line, and the line held. I am always fascinated about how accurate these chart patterns can be. You can see that it dropped until it met it, then bounced up again.
What surprises me most is that these are composite indices. I can understand how a single stock can have levels where people think it is ‘cheap’ or ‘expensive’. That is easy to understand. But an index containing hundreds of stocks? How can that be so accurate? I am continually amazed, but there you have it. The market is telling us what it is doing, and we have to be able to listen (well, read it).
Putting SPYG in perspective:
Unlike SPY we are nowhere near our previous high You can clearly see the support / resistance line has been touched 6 times, so it is a significant level.
QQQ Chart
I haven’t tested ITM on QQQ, so I can’t recommend it – although I do trade it, but not strictly ITM. However, as it is such a big component of both SPY and SPYG it is wise to keep an eye on it.
Like SPY QQQ is closing in on its December highs, and did not retrace to the support level. Even more interesting is the weekly chart. It has now exceeded its previous all time high of $403 and is now trading at $409.
I have drawn in the support line at $260, which proved to be a solid support. As I mentioned above, I am continually amazed at how well charting works on indices.
VIX Chart
The VIX continues at very low levels. Apart from a short time in March 23 and Oct 23 we have now been in a low-volatility environment for a year.
ITMeter
The week ahead
Earnings season again, plus everyone is watching for clues about interest rates. I am no economist, but read the ‘Calafia Beach Pundit’ who has an excellent commentary and lots of graphs that explain things better than words. Here’s the link: https://scottgrannis.blogspot.com/
Everything looks rather neutral at this stage, 12 hours to market open.
As always, fingers crossed for a good week, lets hope SPY makes a new high!
Heather
12 thoughts on “Stock Market or Casino?”
Hello,
I enjoy reading your blog. I find it both interesting and easy to follow. The charts are also simple and easy to understand.
Hey Ed – thank you! Always lovely to hear from happy readers!
h
Hello again Heather. Quick question for you. If we are looking to open an ITM call on SPY today, what expiration should we be looking at? Is it the January 2025 expiration (since that is closest to 1 year out)?
Hi Jeremy – I would go for somewhere between 6 – 12 months. Looking at the options chain I see that the June 24 240 strike is 238/239 which meets requirements, the September 24 240 strike is 240/241 which isnt much above the 1% and the Jan 24 240 strike is 241 / 243 which is just under 2%.
Probably the September 25 would be best.
Hopt this helps
h
Thanks Heather – I assume in the last sentence you mean the September 24 would be best?
Yes – silly me. September 24 would be best I think.
h
do you have any comments on the wheel option strategy?
Hi John – I read the Wheel Options Strategy book a while ago in response to some of my readers asking about it. For those who don’t know what it is, it is a sequence where you (1)sell put options on a stock you want to own until you are exercised and have to buy the stock, then (2) you own the stock, then (3) you sell calls against the stock until you are exercised then you start 1 – 3 all over agaon, hence the name the ‘wheel’.
The profitability will depend on the stock you pick and the premiums you get – I am sure there are lots of examples where it works, but I haven’t seen any where it is compared against , say. holding a DITM option.
Re using it on SPY – I have frequently checked out selling weekly puts & calls and I can’t get the profitability I need. To get a decent premium you have to place your call (or put) very close to the current price, say 2%. Even then if I look at options expiring in 5 days then I will get a premium of $50 on the call and $30 on the put. That’s a return of 0.1% and 0.06% respectively. To me that’s not worth the risk of losing any increase over 2% in the SPY.
I have been asked about it quite a few times, and its been a while since I did a blog on it, so I am putting a note in my diary to cover it in more detail on the next blog.
Hope this helps.
h
Heather, First of all, what a fantastic method for trading the market! I’ve just gotten serious about trading in the last two years. A couple of questions: 1) Where do you get your backtesting info on the SPY options? I like to dig into the numbers and want to look at 2023 backtesting. 2) Are you willing to post your *.xls or *.csv files of your spreadsheets?
HI Brent
You can get backtesting data on Yahoo – here’s a link. https://finance.yahoo.com/quote/%5EGSPC/history/ Just be aware it is sometimes a bit flaky and won’t go back far enough but if you persevere it does.
Re putting up the .xls backtesting files – I did at first, but decided it wasn’t a good idea as some people would download them, change some figures, then claim that my figures were not right and that I had fixed the results. It would take ages to cross match mine with theirs to find out what was different. I was wasting a LOT of time on it, so I don’t do that any more.
Having said that I have created a new backtesting system and am updating the books with the latest figures, and when it is completely finished I am happy to list all the parameters and formulae so that people can check for themselves if they wish.
Hope that helps
heather
Dear Heather,
Speaking of Mr. Dent, he has made a few correct predictions and several incorrect predictions. His three most correct predictions are the Japanese stock market crash in 1989, the dotcom crash in the early 2000s, and Donald Trump winning his presidency in 2016. His other predictions were not correct.
Sincerely,
George Halongton
Hi George – I guess if you make enough predictions some of them will come right! He has been predicting a stock market crash pretty well every year, and from memory didn’t he also say that the market was going to drop 70% if Trump was elected? I may have that figure wrong, but he definitely predicte a major drop.
I think he is best used for amusement value – although many news outlets seem to take him seriously!
h
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