That Bull Still Looks Sick!

Heather Cullen

Heather Cullen

In The Money

Bull Market Ends

Is the bull on life support?

Hi everyone! I concluded the last blog post by saying:

By the next Blog Post we’ll probably know whether or not the bull market is over or not. 

But do we? Unfortunately, not. If the stock market were human, it would be diagnosed with ADHD. It started with the over-the-top reaction to the Fed saying they would, sometime this year, increase interest rates. But didn’t we already know that? They had already said that that’s what was going to happen. Yet the market had another ‘taper tantrum’.

It didn’t finish there. This week, the Nasdaq dropped 3.7% in one day, mainly due to the Facebook (FB) results, and Facebook itself dropped 23% in after-hours trading. You would think that something momentous had happened – but no, it was simply that the fourth-quarter profits were short of analyst expectations – by 4.7%. Analysts expected $3.85 and they got $3.67, although the revenues actually met forecasts. FB (now Meta) also missed analyst expectations of active daily users – expected 1.95 billion, actual 1.93 billion. Yes, the guidance for the first quarter of 2022 also disappointed: $27 to $29 billion in revenue, short of $30 billion expectations (via CNBC). But a drop of 23%??? And look at the volume in the chart below.

FB Facebook 6 feb 22

Spotify also crashed 23% on the same day – analysts expected 184 million subscribers, but they only got 183 million. Paypal crashed 25%. Microsoft reported very strong earnings and beat expectations, yet the stock immediately dropped 10%. Go figure. Earlier in the month, Tesla went from a high of $1200 to $829, a 31% drop.

The news wasn’t all bad – Amazon beat expectations, said they were going to raise Prime fees, and went up 14%. Other tech stocks bounced as much as 50%. Google (alphabet) announced a stock split and rose over 9%.

Volatility? We’ve got it.

Logic and reason? Not so much.

So, what does this all mean? I will leave it to John Maynard Keynes to explain:

Markets can stay irrational longer than you can stay solvent

VIX - The Volatility Index

The volatility Index has stabilized a bit although it is over the ‘calm’ level of 20. During January it reached its highest level in more than a year, but still not equal to the Covid crisis. Here is the VIX weekly chart for the last 2 years:

VIX 2020 2022

The Nasdaq ETF: QQQ

As I mentioned in the last post, I know that many of you are using ITM on the Nasdaq ETF QQQ. I do want to emphasize that ITM has not been backtested on QQQ. ITM has been backtested for 30 years on SPY, and all the trades are listed in the ITM Bear book, but not for QQQ.

The QQQ death cross happened on 27 Jan, confirmed on the 28 Jan so if you were following the ITM rules you would have exited on 31st Jan, the next trading day. Since then QQQ has been going sideways so we are not sure which way it is headed. However, the chart is quite a good example of support and resistance lines. All the significant levels are the horizontal lines in the QQQ daily chart below.

A $10K Account

Since I started writing In The Money (Bull Market Strategy) in 2019 the SPY has gone from less than 300 to around 450 today. We are victims of our own success, because this has affected the buy price of a DITM option that meets the ITM strategy for those just starting out.

I have decided to write a second edition of In The Money which will update all the figures, and also give an alternative strategy for those starting with $10K or less. I am backtesting right now and I plan to have the update published by May this year. I hope I meet this self-imposed deadline, because I have my flight to France booked, and am intending to stay in Europe for the whole summer!

Income Strategy

I have also been getting a lot of requests for a book about an income strategy – it is on my radar, but it is not going to happen until late this year at the earliest. I have also had many emails asking about the ‘play’ accounts I mention in the books where I suggested that if you needed excitement and action then you could use a small part of your capital to trade OTM calls. This is a huge topic as there are so many variables, but I have come up with a way for you to check the various strategies and how they would have panned out for you – so:

Trading Journal

I looked at the trading journals on Amazon, and I was extremely disappointed in what was available (and that’s putting it mildly – actually I was pretty disgusted!) You may not know, but the latest ‘make money fast’ Amazon fad is selling ‘low content’ books. You pay to access to a lot of book ‘insides’ – like lined pages, or daily goals, or empty pages for a sketch pad – and then you whack a cover on it and sell it to unsuspecting people who think that you actually know about the topic. 

Sad to say, I think that all the trading journals that are out there have been churned out by devotees of this fad. I can’t see how they can help at all.

As I couldn’t recommend any, I designed one myself. I have put a lot of thought into it to make it useful and easy to use, and I am pleased with the outcome. It’s an Option Strategies Trading Journal. It outlines how to trade different levels of options (ITM, ATM and OTM) and how to evaluate the risk and reward for type of trade, and how to decide which one you should choose.

It will be available next week and if you are looking to diversify and want some action then this will help you do it in a controlled and safe manner – remembering that OTM options should be no more than 10% of your portfolio whatever its size.

I am planning more journals that use different strategies like covered calls and also complex strategies like iron condors (my favorites), butterflies, calendar calls etc. But I’m jumping ahead of myself. Let’s do the first one first. I will email you all when this one is available, and have a special price for 2 days.

Naturally, as a journal it must be able to be written on, so it can’t be an eBook. It will be available as a paperback and hardback, and is A4 desk-size so that it is easy to use and your not trying to squash everything into tiny boxes.

The Coming Week

Well, it will be interesting. It is still earnings season, but none of the big ones like last week. However, DIS (Disney) and PFE (Pfizer) may be interesting. The Bureau of Labor Statistics will release its January Consumer Price Index (CPI) on Thursday, and the market is hoping that this will be 0.4% in January, down from 0.5% in December. But, the annual pace of inflation has a headline figure of 7% year-over-year in December, which has not been seen for many years.

So where is ITM?

SPY – the jury is still out. While the 10/200 SMAs converged they didn’t actually cross, and our signal is the day after there is white space between them. That hasn’t actually happened yet (see chart below). They have met, and are travelling together, but they have not crossed. Surely something has to be definitive this week!

Like you, I hate uncertainty.

SPY 6 Feb 2022

Next Blog Post

Usually, I post every 2 weeks because I figure people have enough emails without my adding to them. However, this seems to be a situation we have to watch closely so I will post next weekend. Hang in there, monitor the charts and be ready to react.

Heather Cullen In The Money Signature

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