Weekend Portfolio Analysis (October 22, 2017)

Market Analysis

It was another week for the record books as both the S&P 500 and Dow Jones Industrial Average hit all-time highs… again.  Market gains were achieved with help from rising company earnings and easing political uncertainty as the Senate passed a 2018 budget resolution. The bulk of company earnings are set to come over the next two weeks; however, taking into account the nearly 20% of companies in the S&P 500 that have reported earnings for the third quarter so far, earnings growth is nearly 2%, and 76% of the companies have reported results above consensus estimates. On Thursday, the market had showed selling pressure early in the session, but the bears could not hook it up and the bulls came back with a vengeance. The latest Investors Intelligence survey showed that 60% of Wall Street newsletter writers were bullish on the market, up from 47% in early September, while the American Association of Individual Investors sentiment survey showed that 40% of retail investors were bullish on stocks over the next six months, an above-average reading. Meanwhile the Merrill Lynch fund managers’ survey reported that cash is moving off the sidelines and into equities, bringing average cash balances down to 4.7%, the lowest level since May 2015.

The S&P 500 (SPX) opened Monday at 2555.57 and closed Friday at 2575.21, up 19.64 points, or 0.77%.

Click Chart to Enlarge

The SPX pegged the upper range of the expected move for the past week, based on options pricing. Current SPX options are pricing in an expected move of +/- 22 points for the upcoming week.

Technology giant IBM had a strong week, surging 10.2% after reporting better-than-expected profits and sales on Tuesday afternoon. The company’s positive performance helped the top-weighted technology sector climb 1.0% and helped the price-weighted Dow Jones Industrial Average finish comfortably above the other major indices. Year-to-date, the Dow has now outperformed the S&P 500 and the Russell 2000, only being surpassed by the Nasdaq. Interesting to note is the near vertical rise in the Dow as evidenced in the multiple timeframe chart below.

Click Chart to Enlarge

Crude oil prices held steady this week. The EIA (U.S. Energy Information Administration) released its weekly crude oil inventory report on Wednesday indicating that crude oil inventories fell by 5.7 million barrels to 456.4 million barrels  – the lowest levels since August 25, 2017. This was considerably more than analysts estimates of a 3.2 million barrel decline. In a speech Thursday, the secretary-general for OPEC stated that the oil market is balancing at an “accelerated pace” and demand will continue to rapidly grow in coming decades.

Also of note is that the oil-market structure has moved toward backwardation. This is where prices for oil delivery in the near future are higher than those for later deliveries. This makes it unprofitable for traders to hold oil in storage. This change is a sign of tighter supply and robust demand. However, as oil moves back towards the $60 range, U.S. shale producers are likely to turn on their rigs and flood the market with additional supply.

Baker Hughes reported on Friday that the number of active U.S. rigs drilling for oil fell by 7 to 736 this week, marking a third consecutive weekly decline.

Crude oil futures for November delivery opened Monday at $51.43 per barrel and closed Friday at $52.07, up $0.64 or 1.24%.

Click Chart to Enlarge

Trade Activity

It was a fairly quiet week with only one new trade and one closing trade.

/CL February 68/40 Strangle
On Monday I opened a new crude oil position for the February expiration. Volatility remains muted in crude oil, so we selected strikes that were out at about two standard deviations and kept our position sizing small.

Trade Details:
SELL 1 /CL Feb 68 Call @ 0.06
SELL 1 /CL Feb 40 Put @ 0.15
Credit: 0.21 ($210.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 39.79 / 68.21)
/CLG8 Current Price : $52.53
Margin Required: $720.00
Days to Expiration: 93
Probability of Profit: 94.60%

/ZS December 1080/870 Strangle
On Tuesday we closed out the soybean strangle at our target profit of 50% of maximum profit. The strangle was originally sold for $2.75 on September 29th. We bought it back for a debit of $1.25 which net a profit after commissions of $58.76 per contract. In just 18 days we cleared an 11.82% return on our capital.

Current Portfolio

/GC January 1480/1170 Strangle
$280.00 Credit. 65 days to expiration. 4 deltas on the puts and 2 deltas on the calls. Currently at 35% of maximum profit. This high probability trade looks good so far and we plan to be out of it within the next two weeks.

Click Chart to Enlarge

/NG December 3.8/2.4 Strangle
$200.00 Credit. 36 days to expiration. 2 deltas on the puts and 9 deltas on the calls. Currently has a small loss of $10.00. Despite the small loss, the trade still shows a 92% probability of profit with just five weeks to expiration. I expect that the theta decay will start to accelerate over the next few weeks.

Click Chart to Enlarge

/ZW December 480/490/425/415 Iron Condor
$412.50 Credit. 33 days to expiration. 47 deltas on the puts and 5 deltas on the calls. Currently has a loss of $281.25. This trade has fluctuated between showing a profit and having a loss. Every time wheat prices have fallen to these levels, they have rebounded. However, if they continue to drop further, we will make an adjustment trade this week.

Click Chart to Enlarge

Plan For Next Week

I will be watching the wheat iron condor carefully to see if we need to add an adjustment trade. Also, we will continue to look for other new trades that can be added to the portfolio.

The portfolio is currently up 17.4% for the year versus up 14.4% for the S&P 500 (see Trading Results).  The portfolio is currently 69% in cash.

New Features for PRO members

Be sure to check out our two new features exclusively for PRO members. First, we have added a Trading Forums section to give PRO members the ability to interact with one another an various trading topics. Also, many readers have inquired about the Thinkscript code that is used to generate the IV indicator at the bottom of our ThinkOrSwim charts. We have now made this script available for PRO members here.

As always, comments are welcome below. If you have not signed up for your FREE membership yet, please be sure to do that so that you can access additional content on this site. Also, be sure to check out the PRO membership, our real-time trade alert service.

Happy Trading!