Weekend Portfolio Analysis (April 4, 2015)

Market Conditions

This past week the market traded in a fairly narrow 40-point range with the SPX opening on Monday at 2064.11 and closing the holiday week on Thursday at 2066.96 up just 2.85 or 0.14% on the week. Mixed economic data during the week created some intraday volatility as speculation increased regarding the initial Fed rate hike. Friday, the stock market was closed for the Good Friday holiday, however the futures market traded an abbreviated session. Non-Farm Payrolls were announced Friday morning and missed the target by 50% adding only 126,000 jobs vs. the expected 245,000. The S&P futures plunged nearly 1% on the disappointing news ending the session down 19.75. Bonds rallied on the news with the yield 10-year Treasury notes falling as low as 1.829 percent before finally closing at 1.904 percent.


Crude Oil rallied on Wednesday for the first time in four days after weekly U.S. stock builds turned out to be less than some feared, and negotiators missed a deadline with regards to the Iranian nuclear talks that might bring more supply to the market.


Trade Activity This Week

On Wednesday, crude oil spiked up over five percent after the petroleum inventory report was released. I still have a neutral/bearish outlook on crude oil. I faded Wednesday’s rally by selling the /CL Jun 71 call option for $1.00 ($100 premium received). The implied volatility is still near the upper end of its range, making this an attractive underlying to trade.

Earnings season is officially underway and Wednesday offered an opportunity to place my first earnings trade of the quarter. I tweeted the following trade just before the close:

Earnings trades for me are strictly a volatility play by taking advantage of the high volatility just before the earnings announcement and the subsequent vol crush after the announcement. In this case, I sold the 29/25 strangle for $0.43 and bought it back the next morning for $0.13.

On Thursday morning, I also closed the weekly SPX 2020/1995 put spread. I sold the spread on Monday for $0.40 and bought it back for a $0.05 debit. At the end of the day, I sold the SPX Apr2 1975/1950 credit put spread for $0.40.

Throughout the week I attempted to get filled on some longer-term credit put spreads in SPX with no success.

Plan For Next Week

The portfolio is currently over 50% in cash and is up 5.39% for the year versus 0.4% for the S&P 500 (see Trading Results), despite the significant drawdown in late March.

With Friday’s disappointing non-farm payrolls report and corresponding 19.75 drop in the /ES futures, I expect the market to sell off sharply at the open on Monday. With the SPX now below its 50-day EMA and likely to drop below the 2040-2060 support zone on Monday, their is a good chance that the index could drop all the way down to the 200-day MA (2010). There is an area of resistance at this level. A break of the 200-day moving average will likely lead to a re-test of the October 2014 lows. Large moves down continue to offer opportunities for adding long-term SPX or RUT credit put spreads to the portfolio.

Below is a chart of the Dow Jones Transportation Index.  This is an ominous chart that demonstrates a clear reversal in the trend since it made a high on November 28. The index dropped below the 200-day moving average on March 25th and has been in a sharp decline since. The transports are considered a leading indicator of economic conditions.  One must question the strength of our economy when the transports are weak despite record low fuel prices.


Next week I will also be looking at some possible earnings trades. Two that I will definitely be looking at are Alcoa (AA) and Bed Bath and Beyond (BBBY).

I hope that everyone has an enjoyable and safe holiday this Easter!

  • Jonathan

    Thanks for the weekend analysis. I would love to sell more credit put spreads if we are heading lower next week. I will also be watching your earnings play.