Weekend Portfolio Analysis (May 14, 2016)

Market Conditions

Stocks were marginally lower on the week with the S&P 500 index suffering its third consecutive weekly loss. Despite strong gains on Tuesday, the market was unable to shake off the poor earnings reports from stocks in the consumer sector along with disappointing guidance from Macy’s, which dragged consumer discretionary stocks down. Even a better-than-expected April Retail Sales report on Friday (up 1.3% actual vs. 0.8% estimate) was not able to stop the slide in equities.

Investors received another batch of quarterly earnings throughout the week with nearly 92% of the S&P 500 companies having now reported their results. Earnings per share have declined by 12% year-over-year, the fifth quarter in a row that profits have fallen.

Fed officials spoke throughout the week with some cautioning that the possibility of a rate hike in June should not be dismissed entirely. The fed funds futures market, however, remains convinced that the next rate hike will not come before December. The market is pricing in just an 8.0% probability of a rate increase in June, while the likelihood of a December hike is at 62.0%.

The S&P 500 opened Monday at 2057.55 and closed on Friday at 2046.61, down 10.94 or 0.53% for the week.


The SPX continues to remain rangebound with very strong support at 2040. At this point, the market appears to be making a small correction from the April highs with a slight increase in the level of volatility.

Crude oil pushed higher again this week, gaining ground for five of the past six weeks. On Wednesday, prices jumped more than three percent after the Energy Information Administration (EIA) reported that crude inventories fell unexpectedly by 3.4 million barrels last week. Analysts had expected an increase of 714,000 barrels and the American Petroleum Institute (API) had reported on Tuesday that they expected inventories to build by 3.5 million barrels. The drop in inventories compounded the concern over supply disruptions due to the situations in Canada and Nigeria.

The U.S. crude oil rig count, as reported by Baker Hughes, declined significantly by 10 to 318 operating drilling rigs. This is the lowest rig count since late 2009.

Crude oil opened the week at $45 per barrel and closed Friday at $46.37 per barrel, up $1.37 or 3.04%.


Crude oil experienced a bullish technical development on Monday when the 50-day simple moving average crossed above the 200-day simple moving average (also known as the Golden Cross). This is the 24th time that this has occurred in the past 33 years. As indicated in the chart below, the price of crude oil has done well historically after the golden cross occurs.

CL after Golden Cross

Further data shows that the golden cross is even more significant after an extended bear market (defined by a period of at least 300 consecutive days in which the 50-day SMA is below the 200-day SMA). The most recent bear market in crude oil was 422 days and marks the longest period of time in history that the 50-day SMA has been below the 200-day SMA. There have been three other times in history where crude oil traded for more than 300 days before a golden cross occurred. After each of these occurrences, oil prices rose significantly within the next twelve months.

CL after Gold Cross Bear Market

Gold prices have retreated from their highs on the back of a stronger U.S. dollar. The probability of higher interest rates towards the end of the year has propelled the dollar higher, which, in turn, weighs on dollar-denominated commodities such as gold. Gold opened the week at 1286.7 and closed on Friday at 1274.3, down 12.4 or 0.96%.


Trade Activity This Week

TradeHistory_051316This week I closed four positions and opened two new positions. Clicking the thumbnail on the left will display the actual trade history for this past week.

Implied volatility continues to contract significantly in crude oil. On Monday morning, I closed my last remaining crude oil position, a /CL Aug 65/22 strangle. I originally sold two contracts on April 18 for .18 each. I purchased them back at .11 each. This was not quite my target of 50% of maximum profit. However, I was concerned with the possibility that volatility might start to increase again due to the Canada and Nigeria situations. I figured it was best to just take the solid profit that I already had on the table. After commissions, the position yielded a profit of $111.52 or an 8.45% return on capital in 21 days.

Gold also saw a contraction in volatility on Monday. It was enough of a decline in volatility to trigger the closing of three /GC strangles throughout the day!

The first trade that I closed was the /GC Jul 1500/1075 strangle that was originally sold on April 21 for 3.20. It was purchased back for 1.60 which net a profit of $145.76 or a 14.84% return on capital in just 18 days.

The second trade closed was the /GC Aug 1650/1050 strangle which was opened on April 29 for 3.10. This trade was closed for a 1.50 debit which also resulted in a $145.76 profit or a 21.19% return on capital in only 10 days!

The final trade closed late in the afternoon. The /GC Jul 1525/1050 strangle was the last remaining gold position for the July expiration. This strangle was opened on April 19 for a 2.30 credit and was closed for a 1.10 debit. This resulted in a profit after commissions of $105.76 or a 15.37% return on capital in 20 days.

These four trades on Monday totalled $508.80 in realized profits. Not a bad way to start the week! It also freed up a lot of capital. In fact, at the close of Monday’s trading, I have over 80% of my capital in cash.

On Friday, I opened two new trades. The first trade was another gold strangle. With implied volatility still fairly high, I placed the following trade.


GC_5_13_2016_at_9_40_05_AM/GC Aug 1625/1050 Strangle
Trade Details:

SELL 2 /GC Aug 16 1625 Call @ 0.70
SELL 2 /GC Aug 16 1050 Put @ 0.50

Credit: 1.20 ($120.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1048.80 / 1626.20)
/GC Current Price: 1271.70
Margin Required: $1047.00
Days to Expiration: 74
Probability of Profit: 99.22%
IV Percentile: 71.43%

Also on Friday, I decided to make a trade in soybeans. This is not an underlying that I have traded before, but I am not real comfortable putting all of my eggs in one basket. Soybeans have seen a recent expansion in volatility with prices jumping over five percent earlier in the week. Soybean prices are on a steep increase after the U.S. Department of Agriculture cut its estimate for global soybean inventories following adverse weather in South America.


ZS_5_13_2016_at_10_48_48_AM/ZS Aug 1500/850 Strangle
Trade Details:

SELL 1 /ZS Aug 16 1500 Call @ 3.25
SELL 1 /ZS Aug 16 850 Put @ 0.75

Credit: 4.00 ($200.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 846.00 / 1504.00)
/ZS Current Price: 1070.50
Margin Required: $360.00
Days to Expiration: 70
Probability of Profit: 98.03%
IV Percentile: 65.08%

Later in the day, volatility increased briefly and I sold a second contract for a credit of 5.00 ($250.00 premium received). As you can see, I have given myself a lot of room to the upside and set the put strike right around the price floor for this commodity.

Plan For Next Week

I will continue to look for opportunities to sell volatility anywhere that I can find it. However, I have already met my monthly return goal, so I am not going to get greedy and will likely keep a lot of cash on the sidelines waiting for an extreme.

The portfolio is now down 5.3% for the year versus up 0.41% for the S&P 500 (see Trading Results).   The portfolio is currently 71% in cash.