Cash-secured puts did badly; Mainly in cash; GMI, GMI-R: 0; Financial Armageddon?

This month I lost money on many of my cash-secured puts. Too many stocks declined below the put option strike price and I had to buy the puts I sold back at higher prices. Selling puts is equivalent to buying stocks and selling call options on the shares. I learned again the lesson not to sell puts or covered calls during a weak or declining market. GMI0116 The QQQQ short term up-trend ended last week. Once the QQQQ fell into a down-trend, I closed all positions and bought a very little of QID, the ultra short ETF on QQQQ. If the QQQQ down-trend deepens I will buy more QID. Otherwise, I will stay mainly in cash. The GMI and GMI-R are both back to zero and the T2108 is at 59%–neutral territory. Only 27% of the NASDAQ 100 stocks closed with their MACD above their signal lines, down from 88% on January 2nd.

Are we near a bottom? Armageddon When three DOW 30 bank stocks, C, BAC and JPM, look like this weekly chart of BAC, I have to think that some kind of debacle is on the horizon. These declines came on huge weekly volume, indicating massive selling. When we factor in that these 3 banks and 7 other DOW 30 stocks fell more than 5% last week, I do not see a bottom, more like a black hole.   Read on to see the graph:

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Uptrend to continue? Writing cash secured puts on promising IBD100 stocks; GMI: 2; GMI-R: 4

The QQQQ short term up-trend is now in its 4th day.  GMI1212

However, there were only 4 new highs and 100 new lows in my universe of 4,000 stocks on Friday.   Still, 58% of the Nasdaq100 stocks closed above their 30 day averages. The GMI closed at 2 (of 6) and the more sensitive GMI-R is at 4 (of 10).   I tend to look to buy stocks when the GMI rises to at least 3. Friday was the 4th day of the current QQQQ short term up-trend. In a few days I will have a better idea if this up-trend has legs……..

In an up-trending market (as measured by the QQQQ), I like to trade the IBD100 stocks.   The IBD100 lists contain the top 100 growth stocks that meet the stringent IBD technical and fundamental criteria.   A new list is published by IBD each Monday.   From time to time, I create a watchlist in TC2007 containing the current IBD100 list.   I now have a watchlist containing about 660 stocks that have appeared on selected IBD100 lists over the past year.   The IBD100 growth stocks tend to perform quite well when the market is rising.   Tonight, I ran a TC2007 scan I have created, on the stocks in this IBD100 watchlist and found 10 present or former IBD100 stocks that appear to be in strong up-trends: EBS,DLTR,ALGT,THOR,INT,APOL,AVAV,LHCG,SHEN,GTIV. I do own a couple of these. But I also have written cash secured put options on some of these stocks with strike prices below the support level .   I am basically betting that the stock will not break below support by option expiration this Friday.   If this technique works out, I will write more about how I do it in a future post.   Writing cash secured puts is equivalent to writing covered calls on a stock, but I do not have to start out by buying the stock.   The cash backing the puts I sell stays in my account in a money market fund and continues to earn interest.   So, I receive the premium from selling the puts AND the interest from the cash backing them.   Quite a nice (but not risk free) income generating technique in my IRA……

GMI: 0; GMI-R: 0; 16th day of QQQQ down-trend; Worden T2108: 11%; VIX: 26%

The GMI and GMI-R remain at zero.  There were  66 new highs and 452 new lows in my universe of 4,000 stocks on Wednesday.  The market was not as bad as it looked, with only about one half of the new lows than we had on Tuesday. Wednesday was the 16th day of the current QQQQ decline.  The Worden T2108 indicator closed Wednesday at 11%, well into bottom territory.  The VIX also moved up to 26%….

The bear got around to killing the previously strong metal and coal stocks.  I learned (again) the painful lesson to refrain from writing covered calls on any stocks during a market down-trend. While QID and my shorts have made money, I lost money on my covered calls, which I subsequently closed out. Only write calls on strong stocks in strong markets.

GMI: 0; GMI-R: 0; 14th day of QQQQ down-trend; QID up 13%; CPST

The GMI and GMI-R remain at zero each.  There were 75 new highs and 526 new lows in my universe of 4,000 stocks on Monday.  Monday was the 14th day of the current QQQQ down-trend.  During that time the QQQQ has declined 6.9% and the QID has advanced by 13.4%.  The QID is a wonderful way for me to make money as the Nasdaq 100 index declines.  One can even buy call options on QID or write covered calls on it. In the midst of this decline it is amazing how well Judy’s pick, CPST, has held up.  CPST is up 21% during this 14 day QQQQ decline.

GMI: 0; GMI-R: 0; IBD100 stocks outperform other stocks by 4 to 5 times!

The GMI and GMI-R are both zero.  The last time the GMI was zero was March 24 at the end of that decline in the QQQQ. That decline lasted 55 days.  The subsequent up-trend that ended in June lasted 54 days.The current QQQQ decline is only in its13th day and may therefore have longer to go. There were 44 new highs and 533 new lows in my universe of 4,000 stocks on Friday.  The last time there were more than 500 new lows was on March 17.  Only 9% of the Nasdaq 100 stocks closed on Friday above their 30 day averages. 

Nevertheless, there is some evidence that we may be near a bottom or at least a bounce.  The Worden T2108 indicator is now at 15%, a level where some past declines have ended.  In addition, according to IBD, the Investors Intelligence poll shows more bears than bulls, (39% vs. 34%) a rare occurrence indicative of the extreme bearishness of market letter writers that is typical near the bottom of declines….

I took a look at the performance of the stocks on the IBD100 list published on June 2. These are stocks that IBD analysts say are the strongest growth stocks in the market.  The list changes each Monday as weak stocks are deleted.  I often trade the IBD100 stocks and was curious as to how they have performed during the current decline. I was amazed to find that since their close on May 30 (the Friday close before this list was published) 51% of the stocks closed higher last Friday than they did on May 30.  Furthermore, 14% of the 100 stocks were up more than 10% and 5% were up more than 20%.  In the same time period, only 9% of the Nasdaq100 stocks advanced, as did 12% of the S&P 500 stocks and none of the Dow 30 stocks.  Clearly, during the current decline the odds of making money on the long side in the IBD100 stocks was 4 to 5 times greater than in the stocks represented by these other major market indexes.  Maybe those folks at IBD really do have a winning stock picking strategy!

In the meantime, I remain short the QQQQ through the QID, in cash, or hedged with covered calls on a few IBD100 stocks, as I wait for this decline to play itself out.

GMI: 2; GMI-R: 2; 8th day of QQQQ down-trend; Stage 4?

The GMI and GMI-R are back to 2. There were 45 new highs and 279 new lows in my universe of 4,000 stocks on Friday.  The QQQQ is in the 8th day of its down-trend.  I am mainly in QID and hedged in covered calls on some of the strongest IBD100 growth stocks. The QQQQ is only 0.32 above its declining 30 week average (see weekly chart below). If the QQQQ closes below its declining 30 week average it will confirm a Stan Weinstein Stage 4 down-trend typical of bear markets. 2NDLEGqqqq

The SPY and DIA have already done so. Only 21% of the Nasdaq 100 stocks closed above their 30 day averages; the last time it was below 21% was during last March's decline.  It's beginning to look like the rise since last March was a retracement of the decline from the October 2007 top, and that a second leg down is beginning. The Worden T2108 indicator is now at 23%, still above the extreme low levels reached at the bottom of most declines.

GMI:5; GMI-R: 6; Split market continues; BAC-plunging banks

The GMI is 5 (of 6) and the GMI-R is 6 (of 10).  The GMI-R counts 4 additional short term indicators not counted in the GMI. Gmi0606

The fact that the GMI-R is only 6 of 10 reflects the weakening in the QQQQ.  Hard to believe, the QQQQ and IJR (small-caps) remain in up-trends even as the SPY and DIA remain in solid down-trends.  There were 115 new highs and 116 new lows in my universe of 4,000 stocks on Friday.  However, only 44% of the Nasdaq100 stocks closed above their 30 day averages, down from over 80% in mid-May.  And only 53% of the 4,000 stocks in my universe closed above their 10 week averages. The Worden T2108 indicator is now at 50%, down from 77% in early May, but far from the area where bottoms tend to occur (below 15%).

Last week I transferred all of my pension money from mutual funds into money market funds.  When I looked at how most of the Dow 30 stocks are  doing, I became very concerned of the future of that index and the general market.  Only 8 Dow stocks closed Friday above their critical 30 week averages, and 3 of these 8 are within only one point of falling below that average.  A stock below its 30 week average is likely in a down-trend and I never buy a stock trading below its 30 week average. Only 32% of the S&P500 stocks and 42% of the Nasdaq100 stocks closed one or more points above their 30 week averages. Most important, the SPY and DIA index ETF's themselves are both below their declining 30 week averages.  The QQQQ's 30 week average is also declining, but that index closed above that average, for now.  So, I remain largely in cash and have written covered calls on most of my long stock positions.

The major bank stocks look especially weak. BAC

Look at this weekly chart of  Bank of America (red line= 30week average; click on chart to enlarge). Other bank stocks with similar charts include : WB, UBS, STI, and DB.  When major bank stocks are in a free-fall, can the rest of the market be far behind?