Is it the end of the bear market?
Well, we shouldn’t go on just one trading day, certainly not one as non-definitive as Friday, but maybe – just maybe – the end of the bear market is in sight. I certainly hope so, bull markets are so much easier and less frustrating.
I hope that my judgement isn’t being clouded by this hope, so let’s be objective and look at the charts to see what the market is telling us (rather than us trying to tell the market what it should be doing). To make sure I am not being influenced by my previous posts I am starting with a brand-new chart with no indicators.
The first observation is that we are looking at a chart in a down trend. Is there any evidence to show that the downtrend has reversed? The first thing to notice is that it has gone sideways in a tight trading band since 16th December, which is now more than 3 weeks. That is the longest it has gone sideways in the last year. Is this significant?
The Downtrend
The downtrend has not been broken as yet. In fact, it is not even being challenged at the moment, as SPY is trading around 20 points away from it. So why would we think it may be reversing?
The MACD Histogram
The MACD histogram is very close to zero (the midline) and another significant up day will take it over the midline into positive territory. This means that the bulls will be in charge, not the bears. Obviously, we don’t know what is going to happen on Monday, but if you are in an ITMB bear trade right now, then Monday may be the signal to get out of it. Wait for the close, check the MACD histogram, and it if is significantly positive (>0.5) then exit your bear trade.
SMAs
Just because we exit a bear trade does not mean that we immediately turn bullish. We have to wait for the signal, the 10/200 SMA golden cross, which has not yet happened. The 10 SMA (magenta) has to cross the 200 SMA (navy) and there has to be whitespace between the SMAs for us to be sure that the bulls are in charge.
Where to from here?
We have to watch the market and do what it is telling us. It could be that it continues its downtrend, or it may reverse direction and start a bull market. Remembering John Templeton’s quote:
Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria
There’s no doubt that there are many bulls just waiting for the market to start a new bull trend. This can be seen by the amount of dip-buying, but to date this year that hasn’t worked out. They have all turned out to be bull traps. This is the reason I don’t think that we are in pessimism, and we are certainly not in capitulation where everyone gives up and just dumps their stocks. But do we have to get to capitulation? The bottom of the GFC in March 2009 was quite a quiet affair compared with the huge candles and volume in late September/October 2008, so we know that we don’t need a dramatic drop before it turns around.
I have no special insight into what the market is going to do, so like everyone else I have to wait and watch to see what it actually does. Gurus can guess, with a 50% chance of being right, and then if they are one of the lucky 50% will afterward pontificate on how they ‘knew’ it and sell their ‘system’ to the gullible. But, the market does what the market does no matter what people say about it.
Books Reviews
I have taken advantage of the holidays to read a few of the books that I am always being asked about. One is The Option Wheel Strategy, by Freeman Publications. There is another book called The Wheel Options Trading Strategy by Markus Heitkoetter which seems to be very similar, but I have not actually read more than the index and introduction, so I am not sure.
The options wheel strategy is not exactly rocket science. The ‘wheel’ consists of 2 steps:
- Sell cash-secured puts until you are exercised – then buy the underlying stock
- Sell covered calls against the stock you have bought until you are exercised, then sell and go back to step 1
So it’s not exactly a wheel, just 2 steps. It is suited to people who are buying individual stocks, enabling them to hopefully:
- Buy at a ‘good’ price stocks that they wanted to buy, while keeping the premium if their put expired worthless.
- Make money by selling calls against stocks they already own.
It sounds seductive, but you have to look at how it works in practice.
Firstly, you have to select a stock that is going up, one that is not too expensive and not too volatile.
Secondly, you have to write a put on a stock that you can afford 100 of (as you will need that in cash to buy if you are exercised).
Thirdly, if you do manage to pick a stock that rises, your put may never get exercised, and so you may never own it.
Fourthly, if you do own the stock and sell a call against it you will miss out on any big rises if you have set your strike too close to the current price.
In previous blog posts we have looked at selling cash secured puts and covered calls on SPY. We found that the numbers just didn’t stack up. That could be different for other stocks, but you would have to check for yourself whether it was worth the hassle. Of course, everything depends on your stock-picking ability, and we know that practically no one beats the market that way.
I’m not ALL negative
While downloading and reading all these books, I have come across one that I think is excellent and that I can heartily recommend. I have read it through quickly, checked out some of the claims (which were correct), now I am going back to re-read it more slowly and make sure that it is as good as I think. I’ll tell you all about it in the next blog.
Readers Q&A
1. If you miss the initial 10/200 Golden Cross, is it ok to enter a ITM trade any time until there is a 10/200 Death Cross? An example would be starting in Jan 2021 where SPY is well above the 200 SMA.
In January 2021, the 10 SMA was well above the 200 SMA which meant that the conditions for entering a bull trade were met so it would have been right to enter. You would have bought at around $370 and would have ridden the rise all the way to almost $480, before getting out at the death cross in February at around $430.
If you did it on January 2022 then you were not so lucky as it was the height of the bull market. The conditions were correct, but you would have seen your account dwindle almost immediately. In an earlier blog post we looked at how much you would have lost in that trade, and it wasn’t pretty.
But ITM has been tested over 30 years, and gets the results that it does, but there is no doubt that you can be extremely unlucky in the timing. However, that applies to anyone in the stock market whether following ITM or not. No-one saw the bear market coming, but then you never do! The market does what the market does, all we can do is watch for the tide and when it goes against us stop riding it.
2. Can you suggest anything for short term options trading?
I can’t recommend anything that I have backtested other than in a non-volatile market, which the current market is most definitely not – but the book I referenced above (the one that I thought was really good) is about short term options trading. I’ll put up my review and recommendation in the next blog update so that may be of interest to you.
3. My question is where I can find back test data and login behind entry and exit of positions.
In the footer of every page is a link to Backtesting. Like this:
4. Have you looked at DITM options in other foreign markets (e.g., Nikkei 225, Nifty 50) which may lead the way out of the current downturn?
No, not the Nikkei. I have some DITM options on the Eurostoxx 50 and AEX (Amsterdam exchange) but I have had them for years, since 2017 I think. They are very long term, they don’t expire until 2024. Seven years! Crazy. I think that I mentioned them in one of the books, that when I tried to buy more I found that Saxo was suddenly not allowing me to buy anything further out than 2 years so I spat the dummy and haven’t been using them (Saxo) for some years, other than holding the options and letting them run (they have currently doubled in price, but then it has been 5 years). But the short answer it ‘no’ – apart from the ASX and the U.S. I don’t really watch any overseas markets.
5. On your blog where you scribbled something and couldn’t read what it was, I’d say it was, “What is Wordle?”
Good guess – but probably not right as I know what Wordle is and refuse to get hooked. I already spend way too much time doing chess puzzles on chess.com, I don’t need any more distractions!
6. You say you use several brokers – which is your favorite?
I find the Schwab platform SSE (StreetSmart Edge) to be the best, it is easy, intuitive and very powerful. You can even get options graphs although I admit they are quite hard to find. Disclaimer: This is just a personal opinion and I am not getting paid to say this or to recommend them.
The 10 Best Days
Last blog we looked at the ’10 best days’ advice, and how prevalent it is. It pops up at least once a month. So predictable. Here is last Friday’s Australian. Looking forward to publishing the book that debunks this myth.
The Bearometer
What's next?
I wish I knew, but the market hasn’t told me yet!
If you are in an ITMB bear trade it may soon be the time to get out (see above discussion) so watch for the market close today. At the time of writing the futures are up, but in a very small way (0.33%), so we may be seeing a continuation of the downtrend. Only the market knows! But if we get a signal I will post here, but not email everyone.
Heather
