The Big Bust?
A new year – and all the catastrophists come out of the woodwork. Headlines like this abound, but should we take them seriously? Always check who is saying it. (no don’t bother clicking on the arrow – its just a snapshot, and besides it isn’t worth listening to anyway!)
In this case it is one Harry Dent. Should we take him seriously? Let’s check his record. Here are a few of his predictions.
This is just a few of his failed predictions – there are plenty more – in fact I don’t think that I have ever read a single one of his predictions that came true! That doesn’t stop the press headlining his latest effort with breathless excitement – and in the interviews no-one asks him about his previous predictions that went wrong.
He also sets up ETFs. He has received awards like the ‘Turkey award’ and ‘Ultimate Charlatan Award’. His first fund, ADDAX closed in 2005 after losing money over its lifetime. His second, Dent Tactical Advantage (DENT), was delisted in 2012, having underperformed the market for 3 years. He has now set up the DENT Sector Fund which, according to its October 23 report (the latest I could find) has lost 8.16% over the last 12 months.
But you have to admire him – he is good at selling books. He has published 11, many of them claimed to be best sellers. So, something works for him. Maybe I should go into the bad predictions business!
P.S. Don’t you love AI images? The bear above has 5 legs, and this bull can’t spell! Too funny!
2023 Recap
Well, 2023 finished on a good note: at the time of the last blog SPY was at $469.33, and on the last day of the year it was $475.31, so the total gains for the ITM Bull strategy for the year were 33% at 100% leverage (strike at 50% of current price at time of entry). Not exactly stellar but we have to remember it is a bull market strategy and we were not in a bull market for most of the year.
Updating ITM Bull & Bear
I am in the process of updating the ITM Bull book – not changing anything radically, but doing the figures to the end of 2023. I am using the backtesting system that I have developed to double check my figures, and also to give me the ability to add in new parameters that may give us an even better edge.
I worry though about having a totally-automated system, mainly because it is possible that we are leaving out a great resource – our human brain. I think I have mentioned Malcolm Gladwell’s book “Blink: The Power of Thinking Without Thinking,” which explores rapid decision-making and intuition.
He postulates that our subconscious mind can make quick, ‘snap’ judgments that are often more accurate than decisions made through careful analysis and deliberation.
Of course, the downside of making decisions this way are (a) it is impossible to create a system that you can explain to other people and (b) snap decisions are often wrong – so how do we know which ones to trust? I would be interested in what you think about this, so please put your ideas / views in the comments.
To the markets
Well, what a dismal start to the year, after a lovely end to 2023. It was a short week, but hugely disappointing. Not unexpected after a strong upward trend over the last 2 months.
SPY Chart
SPY has stayed up above the resistance line at $458 for almost a month, which is a good sign. It is not yet a support line because it hasn’t been tested. A support line acts as a ‘floor’ which prices tend to bounce off, but as we have not retreated that far we don’t know whether this will be a new support line or not.
We noted in the last blog that the $458 level was the high that it reached in late July, and also that it was quite a solid resistance line, with SPY taking 2 – 3 weeks to get through. Currently we are at $468, so it has to drop another 2% to reach it. Will it? I don’t know, but it would not be unusual behavior if it did. If it bounces off, then that is a good sign; if it drops through then is that is a bad sign.
Why is this happening? If we look at the weekly chart for the past 3 years, we get a better idea of what is going on:
Yes, we met resistance at the previous all time high of $479. That is what we bounced off and now we have to watch and see whether there is enough momentum to get through it. If there is then that is a very good sign. But I would expect that there will have to be some consolidation at this level before it does.
SPYG Chart
And so, to the SPYG chart. This is different from the SPY chart in that is has already retraced to the resistance level. If it continues to trade above it then this will become support, so we will be watching closely with fingers crossed. SPYG is more heavily weighted to technology stocks as they are considered ‘growth’ stocks so any drop in the Nasdaq weighs more heavily on SPYG that it does on SPY.
Lets get a bit of perspective on this too:
It is quite a bit different from SPY, in that it has some way to go before reaching its previous high from 2 years ago. Plus, the current support / resistance line is well established, first seen as support in October 2021.
QQQ Chart
The same pattern as SPY, has to drop to $386 to see if that resistance level is going to become a support line.
And some perspective:
We can see that QQQ made a new all-time high in December, but then promptly retraced. We will be watching to see if it dropped to the next support level, which was established in late 2021.
VIX Chart
Still extremely low, no concerns there.
ITMeter
The week ahead . .
Well, I am back in harness after a couple of weeks off. I forgot to turn off the ‘close comments after 1 week’ setting (which I do so that all comments come into the latest blog post) – which meant, of course, that people wanting to ask questions couldn’t do it there, but had to use submissions or email me directly. I have to sift through hundreds of emails to find them, and I will try but if I miss some please put in another comment. I’m not ignoring you!
I will post the questions and replies in the comments area over the coming days so that everyone can see them – using only first names at all, not ‘outing’ you!
Futures
It is around 10 hours to market open, and the futures are slightly negative, but it is too early to read anything into that.
So, lets hope that last week was an aberration and that this year is going to be a lovely bull market!
Heather
Comments, thoughts & questions
38 thoughts on “The Big Bust?”
One question, since I see you are familiar with Metastock. Have you tried using MT4 or MT5 for buying the index? You can use the same notional leverage, which means that you need deposit very little cash. In the UK we would then have negative equity protection and no tax if we spreadbet. The main penalty that I can see is the finance rate at 7.2 currently. Would appreciate your thoughts.
Paul
Hi Paul – I am afraid I am not familiar with Metastock – the last time I used it was on 1999! Seriously. From memory, then it was just a charting package, and I didtched it in favor of something called Bourse, which I don’t think is around any more.
I have been on the Metastock website, but it didn’t explain about deposits, leverage or negative equity protection – but it sounds like it could be risky?
Have to sign off now, waiting for Dell to arrive with new motherboard, PC is flaky and driving me nuts.
So – sorry – can’t really help here.
h
Hello Heather,
I believe while reading prior blog posts there was mention of using DIA with the ITM strategy, however, I have been unable to find it again.
I think the comment was that DIA is not as diversified as SPY which adds risk. However, when I look at the performance of DIA compared to SPY, it tracks similarly (https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=6EwWOMaKET6xBFf17YIQGM).
I don’t think you have backtested the system on DIA, but I wonder if it would be a way to use ITM at a lower cost of entry?
Any thoughts on that?
Jeremy
Hi Jeremy
no, I have not tested ITM on the DJIA, I have always tended to dismiss the Dow because I feel that it is an anachronism today. With only 30 stocks, albeit the biggest, it is still not representative of the whole market, and one stock has too much influence. You will often see days where SPY and QQQ went up and the Dow went down, and vice versa.
I will post a comparative of the 3 indices at the bottom and you can see that in the main they track each other but some times the divergence is quite large.
Re being more affordable, it is trading at $377 so yes, options are a bit more affordable (entry price approx $20k), but the spread is quite high – 2.5% at a 50% strike. I think SPYG is a more affordable option, and ITM has been backtested on that one.
Hope this helps
h
Hi Heather,
Wishing you a very happy and prosperous 2024. With yesterday’s move in QQQ, I’m getting the feeling we’re in a new tech bull market. As a result, have you tried backtesting the ITM strategy on individual stocks? Instead of purchasing shares you could buy DITM LEAPS and follow the same moving average crossover rules but buy individual stocks instead of the index ETFs. Would love to hear your thoughts or any experience you might have buying individual stocks.
Hi Ankur
yes, I actually do use ITM on QQQ, but not strictly the ITM strategy to the letter (as I use my own judgement on some occasions) so I don’t put it in my books. It has worked very well, but I haven’t tested it exhaustively, and certainly not for the last 100 years. That is a problem – QQQ hasn’t bee around as long as SPY.
So, I don’t put it in my books for that reason (although I mention that I use it on QQQ) but I don’t give any backtesting results. Having said that 30% – 40% of my holdings are on QQQ. I am intending to do a thorough backtest (recognising it can only go back 25 years) and considering whether to put it in the 2024 updat of the ITM books.
hope this helpd
h
And – I have just been reminded to say I am not a financial adviser on all answers – so starting here. Dont want to fall on the wrong side of the law!
Hi Everyone – I think I have cleared the backlog of questions – if your question hasn’t been answered could you resubmit it here?
Thank you!
h
2) I plan to allocate approx. $80,000 to LEAPS. Of course, I could lump sum it all in (which mathematically is probably the best thing), but my lizard brain wonders if scaling-in might be better. Building a SPY DITM LEAPS ladder; buying a new call option every 3 months (that is 12 months out) until I am fully invested. The options are then rolled as per plan. That way I spread out the purchases. I tried to see if you covered this on your blog but could not find it. If I missed it let me know and if not, wondering if you can provide your thoughts on this as a strategy. Thanks, Heather. Hope you had a good Holiday season! Jeremy
Hi, I understand that scaling in feels better because it is not such a big decision, but in a rising market it isn’t a good idea. Of course, we don’t know if it is going to stay being a rising market or not!
I have found that for me, personally, if I have decided to get into a trade, I get in. Every time I have waited for the market to come off a bit it seems to continue to rise and I end up kicking myself for not getting in. That said, if I am doing a big buy (say >$500k) I do spread it out a little but only over 2 – 3 days, perhaps 60% on the first day, 20% on subsequent days.
But that is just me. I can only tell you what I do, I can’t advise you what to do!
I do have a couple of questions for you if you don’t mind: 1) Another book I have read is Russ Mathews “Stock & Options Trading for Life”. In his book, he covers a Stock/ETF Replacement strategy using DITM LEAPS. One of his criteria is that the option price should not be more than 20% of the stock price. The thinking is that this helps so you are not overpaying for the option. What I find is that to do this you need to lower the Delta to around 93 or 95 depending on the DTE. What are your thoughts on using this 20% rule?
Hi Jeremy
It sounds like Russ Mathes has the same idea (and I quickly checked when he published in case he had plagiarized, but it was 2019 so he’s in the clear!) and I can see the advantage of using a 20% strike DITM call as a replacement for a stock. It just gives you a little more leverage than holding the stock itself.
The reason I choose 50% strike (apart from the math being easy to explain) is that it gives you 100% leverage and gives us a 99% intrinsic value and 1% time value, which I think is acceptable.
Oh, I see what you mean. Sorry. Not the strike, the cost. If the stock is trading at $100 you shouldn’t pay more than $20 for the option. OK. Let’s check SPY.
Currently trading at $474.60
20% of $475 is $95
The January 2026 strike $425 option is trading $92.15 / $96.61 so this would fit the strategy.
This is a fair enough strategy, better than buying OTM options, but check what you are buying:
Effective price: $425 + $96.61 = $521.61
In other words, SPY has to rise 10% to this price before you break even, and surpass it before you are in profit,
Let’s look at the profits.
If SPY rises 16% to $550 – you will make a 29% profit.
If SPY rises 20% to $569 – you will make a 50% profit.
If SPY rises 30% to $619 – you will make a 100% profit.
If, on the other hand you had bought a 50% SPY option strike $240 at 244.56 / 249.00 your effective price would be $489 so you would start going into profit earlier, at $490. The leverage is not as high –
If SPY rises 16% to $550 – you will make a 24% profit.
If SPY rises 20% to $569 – you will make a 32% profit.
If SPY rises 30% to $619 – you will make a 52% profit.
The main difference, is the losses which are greater. With the $240 option, SPY has to drop to $240 before it is worthless, whereas the $425 option becomes worthless at $425. I’m sure you can do the math yourself so I will leave it at that.
Basically, because the $425 option is nearer the money you have a larger time value, which is good if there is a major rise in SPY but not so good if there isn’t.
Hope this makes sense. I wasn’t expecting to have to do any math today, so it has been a bit hard to concentrate!
h
Thanks so much for the reply here, Heather! I appreciate the in-depth answer to this question.
As I digest DITM long calls, my biggest learning is the concept of effective price, and trying our best to be only 1% above the current SPY price. That is the big risk management piece here. Thanks for that clarity!
HI – glad you found it useful. It’s something no-one seems to mention but to me it is terribly important.
h
I just got a couple of your books for Christmas and have found them very enlightening. I’ve been focusing recently on day/swing trading and dividends, and am starting to make some modest gains now that the market is picking up. However, I really like the math involved in your ITM method. I was a bit confused about which MAs you were using for signals (SMA 10/200), but your blog examples on your website helped to clear up my confusion. I’ll be shifting funds around so that I can participate, and I look forward to hearing more about this and your thoughts on current market developments!
Jason
HI Jason, glad you found the books useful – yes, the 10/200 cross is the one to watch.
I have been playing with my recently-created model trying all sorts of combinations, and it is absolutley the best performer.
The Bear one has a different set of conditions, but hopefully we won’t need it again for a few years at least!
h
Hi Heather! Do you have the backtest available for the ITM bull and bear? I see that your website has it for the bull only. The ITM bear book has it, but only through Aug 31, 2021. And the website December year end blog talked about how 2022 and 2023 did, but again, that was referring to the bull strategy. Even if it didn’t do well in 2022 and 2023, I would like to compare it to the bull only strategy. Thank You! Brian Partridge
Hi Brian
The 2023 update of ITM Bull went right up to 16 Feb 23, and the results for SPY and SPYG are on the website, here’s the link:
https://heathercullen.com/backtesting/
It also gives the results for Timing the Market.
Oops, just reread your question. It is about the bear strategy. All the trades are listed in the book, and since them we have only done 2 very small trade small trades as SPY only briefly dropped into bear territory. Both were unsuccessful, I think I have covered it in this blog: https://heathercullen.com/this-bear-will-not-behave/
I am actually updating both the bull and the bear trades to 2024, so I will be able to give more info when I have done this.
h
I recently read your book. I really enjoyed it, but don’t recall if you mentioned why you don’t buy LEAPs (longer than 1 year). Thank you!
Hi Jeanette
I don’t buy longer term because we will be paying more than we need for time value. If we buy a 100% leverage option (at 50% of the current SPY price) and SPY moves up then the strike we have chosen will fall to less than 50% and our leverage will be diminished.
I mention in the book that when your leverage drops below 50% then you can consider rolling up to a higher strike to keep your leverage. This happens most of the time (i.e. when there is a bull market) so buying options greater than 1 years diesn’t really help us.
There is nothing wrong with buying a LEAP and rolling less frequently, only that your leverage is probably going to be reduced.
Hope this helps.
h
I have read your Bear and Bull market ITM books. I really enjoyed reading your books and your proof of results. I am trying to get my daughter to read at least the Bull market ITM book. Keep the books coming.
Larry
Thank you Larry! perhaps if you tell her its easy to read and not at all hard you may be successful. I hope so. I wish I had known this when I was 21!!
h
In December 2023 I started to follow your ITMS for small accounts strategy. I bought SPYG 6/21/2024 $35 calls. When shoudl I consider selling these calls to buy similiar calls with an expriation date further out? Thank you.
Mark
HI Mark
You have a fair bit of time on them, I would be looking at rolling them in April, sooner if SPYG increasses a lot and you want to keep your leverage at 100%.
Hope this helps
h
Hi Heather,
I enjoy reading your weekly blog. By the way, there is a new ETF in town which is 4x leveraged of SPY and the symbol is XXXX.
Sincerely,
George Halongton in Los Angeles
HI George – thank you – and a 4X ETF! That is the first one I have heard of. Talk about volatility!
I have just done a quick bit of research – it appears to be an ETN rather than an ETF in that it does not hold a portfolio of assets, but unsecured debt securities issued by financial institutions. They are still reset daily, like ETFs which makes them only really suitable for day trading.
Just been graphing it and since its inception in December, and it has been shadowing SPY quite well, has not diverged. But there is a good article here: https://www.marketwatch.com/story/is-this-a-stock-market-or-a-casino-new-4x-leverage-s-p-500-etn-met-with-caution-c256b19d?mod=mw_quote_news
Thank you for brining it to my attention – the first 4X ETF / N.
h
Hello Heather,
I was fortunate to buy SPY calls in November just after the Golden Cross. I have the June 215 calls. I read in your book that you suggest rolling up and out when the option strike is less than 50% of the value of the SPY. Just checking to make sure my understanding is correct. I also have March 35 SPYG calls that I think should be kept for the time being. I really appreciate the feedback you give your followers. My positions are soundly profitable and so easy to maintain.
Hi Bill,
you would have had a bumpy ride last week – but yesterday was a welcome change!
Yes, if you want to keep your SPY leverage at 100% then moving up to the $235 / $240 strike would be advisable (i.e. 50% of the current price of $475). Re SPYG – currently $64.50 so the $35 call will give you slightly greater that 100% leverage.
And after the 2022 bear it is nice to be in the market again, and making profits.
Thank you for your kind words.
h
Hi Heather,
This may or may not be relevant to “The Big Bust” but have you taken a look at Bitcoin? I know many, many fads have come and gone but this seems to me to have “legs”. Why, because governments cannot resist spending more than they have so the currency is inevitably devalued. The more they spend in excess of revenue, the more they have to borrow. Interest payments then begin to erode the ability to spend. Result Wiemar Republic or in today’s world, the dollar. I believe that Blackrock is going to obtain approval for a Bitcoin ETF and FASB has already approved public companies’ Mark-to-Market accounting allowing for removal of the lower of cost or market valuation obligation. on balance sheets. This really will open the flood gates for demand for an inflation proof medium of exchange. I would urge you to read the books by economist Saifedean Ammous. They are groundbreaking in their analysis of mediums of exchange and in particular Bitcoin.
There might be a place for it in your strategy.
Hi Ron, I must acknowledge that I tend to dismiss bitcoin – I remember when it was first drawn to my attention many years ago – 2009 I think, and I remember thinking that it seemed like a programmer’s dream and was not really practical. I looked at it again a few years later, and tried to find out if there was an options market – there was, but it only went out 1 month and bitcoin had to move +30% or -30% to breakeven, so I dismissed the thought.
I then had a flutter using CFDs on bitcoin, and got severely spanked – from memory I put $1,200 unto the account and a day later it was worth less than $100.
So I’ve given up on it as it is too volatile for me!
I have looked at https://saifedean.com/ and he looks as though he knows what he is talking about – I will put him on my reading list!
thanks !
h
Thanks Heather. Like me, you had a great idea, you were just too soon which is equivalent in outcome to a bad idea timely implemented.
The factors I mentioned MAY make it different this time. Ammous makes a number of fundamental compelling arguments. Please read his first book . The books are college level textbooks and packed with profound fundamental truths “The Fiat Standard: Debt Slavery Alternative to Human Civilization Hardcover – November 16, 2021”
I think he will convince you and if he doesn’t then look at the 1,100% increase in the last five years.
OK will chack – but my curiosity won’t wait – what had a 1.1k increase in 5 years? Are we talking bitcoin?
h
Shame on you!! If you had looked a little further on that Fox News article, indeed it referred to Harry Dent, but the big-ass picture was of Kevin O’Leary (of Shark Tank) and, had you extended the cut/paste a little lower you would have included the caption “Kevin O’Leary to investors: You cannot time the market … O’Leary Ventures chairman Kevin O’Leary, from ‘Shark Tank,’ analyzes the outlook for the economy in 2024 on ‘Kudlow.'”. Without the caption, the post is as misleading as the subject predictions that are being panned.
HI Vern
Mea Culpa. I had seen the video a few days ago, and hadn’t snapshotted it at the time, so I just googled and as soon as I saw the talking head and the headline I grabbed it. But – right headline wrong head!
I have changed it now to the correct head.
If the post was misleading I apologise – but the text is correct I just got the wrong middle-aged man in the frame!
Changed now.
h
hi heather,
thank you for detailed informations.
your blog posts are looking always clean and very professional.
may i ask you with what programm, you are managing your emails and were publish your the blogs.
regards
thomas
Hi Thomas – thank you! I use Elementor on WordPress for the website, which uploads to Mailchimp so that I can send the emails. I use FastComet for hosting.
Photoshop for the images, and OptionsGear for the graphs.
I think that’s all, but if I have missed anything please get back to me, happy to share!
h
Welcome Back Heather,
I’ve never listened to or trusted the financial news media. Now Yellen has come out and said that inflation is under control (does she actually buy her own groceries?) and that we have achieved a soft-landing. Therefore, I no longer trust the government (this is nothing new), especially after 4Q 2023, where a downtick was nowhere to be found and PEs for the rotational sector strategy are sky-high.
I also follow Congress Trading (there are a few public websites) and they are almost 100% in bonds – and who would have better access to insider trading?
Shades of 2008.
Anything’s possible, but my comfort-zone strategy is to stay on the sidelines in CDs until things “normalize” into a free market.
For everyone else, Happy New Year and Happy Trading in 2024,
Ronny
Hi Ronny – they fiddle about with how they measure inflation, so it is not really indicative of reality, and I haven’t trusted any government for a long time! I haven’t followed what people in congress are doing – I was going to make a snarky comment here, but I have promised myself this blog will be apolitical, so I will restrain myself.
Re normalizing into a free market – that would be nice, but I don’t think it is going to happen in my lifetime, so we just have to deal the hand we are given.
And happy new year to you and everyone else too!!
x
h
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
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