Weekend Portfolio Analysis (October 31, 2015)

Market Conditions

Trick or treat? The S&P 500 was up for a fifth consecutive week posting its largest monthly gain since October 2011. The large-cap index racked up 159.71 points in the past thirty days for a staggering 8.32% monthly gain. On Wednesday all of the major indexes rallied, including the laggard Russell 2000, in response to the FOMC announcement that interest rates would remain unchanged for now. The Fed has opened the door to a potential rate hike in December. Other economic news was mixed this week with consumer confidence coming in much lower than expected on Tuesday (97.6 actual vs. 103 expected). On the other hand, the Chicago PMI reported on Friday morning was extremely strong (56.2 actual vs 49.4 expected) driving the markets lower – another case of good news being bad news. The SPX opened on Monday at  2,075.08 and closed Friday at 2,079.36, up only 4.28 or 0.21% for the week.


Crude oil soared by over 5% on Wednesday. The rally was fueled by weekly data from the U.S. Energy Information Administration showing a 3.4 million barrel gain in commercial oil inventories for the week ending October 23rd, much smaller than the 7 million barrel or larger gains posted in the previous weeks. But while U.S. output is declining, global supplies of crude and refined oil products continue to grow, testing storage capacity and hammering oil company results. This is prompting oil bears to argue that price rallies, such as Wednesday’s, cannot be sustained. According to Baker Hughes, U.S. oil drillers removed 16 rigs in the week ending October 30th, bringing the total rig count down to 578, the lowest since June 2010. WTI Crude opened the week on Monday at $44.74 per barrel and closed Friday at $46.39, up 1.65 or 3.69%.


Market Commentary

The markets continue to remain overbought and seem committed to testing their all-time highs set back in June. However, I continue to see warning signs. In last week’s Portfolio Analysis, I discussed some of the fundamental issues that give me pause about the current bullish euphoria. This week I would like to briefly look at some technical issues.

The first thing that concerns me is the Russell 2000. Although the RUT made a strong push above the 8-day exponential moving average (EMA) on Wednesday, the rally broke down on Thursday and Friday closing right back at the 8-day EMA. Looking at the chart below, there is a definite divergence between the RUT and SPX which has existed since mid-October. I have a hard time believing that the market can go much higher unless the small cap stocks follow suit.


The second red flag is the transports.The transports are sometimes considered a leading indicator of what is to come. This week in particular, the divergence between the transports and the broader market increased significantly. This is despite historically low crude oil prices which typically are bullish for the transports.


The volatility in the commodities such as crude oil has staged a comeback in comparison to earlier in the summer. The crude oil VIX (OVX) which measures volatility of oil prices currently stands at 41.95 – nearly 45% above its lows in June. While these figures are off the September highs, volatility has clearly increased in crude. Rising volatility in commodities is often an indicator of rising prices. Although that remains to be seen, crude oil is certainly offering great trading opportunities right now.


Trade Activity This Week

It was a quiet trading week with only one closing trade. I have continued to struggle with the /ES straddle positions and am looking for an opportunity to exit these positions with minimal damage to the portfolio returns for the year. However, SPAN margin requirements to hold these positions have continued to increase as the positions have moved unfavorably. Additionally, one of the deep in-the-money /ES call options was pricing incorrectly for three days on TOS which resulted in my buying power being reduced further. As crude oil volatility spiked earlier in the week, I decided to exit the /CL strangle as a scratch trade just to free up some buying power. This will permit me to hold the /ES straddles a bit longer.

Plan For Next Week

Again, I will continue watching the /ES straddles. With only 20 days to expiration on the 1950 position, I am hopeful that theta will begin to decay quickly and an opportunity to exit will arise.

The portfolio is up 46% for the year versus 0.99% for the S&P 500 (see Trading Results).   The portfolio is currently 15% in cash.

Happy Halloween!

  • I think the market is ready for a good rest after an astounding run in October. We have the jobs report next Friday which might cause the market to go down if the the report is excellent. Good luck with your straddles.