This week, I would like to share with you how our portfolios performed over the past four weeks of the April Expiration Month. It was a terrible environment for our strategy because we had to endure the double whammy of excessive volatility (the market rose 13.5% while we do best when it is flat) and a falling VIX (down 26%) which generally hurts the values of calendar spreads. In spite of these problems, we managed to do pretty well.
Terry
Results for the April 2009 Expiration Month:
One of our portfolios is set up to do best when the market falls. We call it the Big Bear Mesa. Last month, its underlying (SPY) rose a whopping 13.5%, so there is no surprise that this bearish portfolio lost money. Yet the loss was only 6.2%, a small loss compared to such a surge in the stock price. If the market had only gone up 5%, this bearish portfolio would have made a nice gain (and if the market had fallen, a bigger gain would have resulted, of course).
Other portfolios which were basically neutral or bullish did much better. Our second-best gaining portfolio was the Boomer’s Revenge, up 15.5% (I have been telling you about this portfolio over the past several weeks). The reason for this wonderful result was that the portfolio got started one week into the month, and some of the big market gain had already taken place during that first week. In the 3 weeks that this portfolio was in business, the market went up “only” 7.5%. The 15.5% gain for the portfolio gives us a good indication of how well the portfolios might perform once the market manages to settle down to historical norms (as it is bound to do at some point, as we seem to say every month).
Our best performing portfolio was our Leaping Lizard 2 which is based on an ETF of financial companies which surged last month. The portfolio gained 20.8% for the month. While the ETF gained even more than our portfolio, we would have made the 20% gain even if the ETF had remained absolutely flat.
In total, our 8 portfolios made a 6.4% (77% annualized) composite gain for a difficult month for us because of the excessive volatility. The risk profile graphs of our portfolios indicate that 15% gains are possible in the next 4 weeks across a fairly wide range of possible underlying stock prices. Most of our portfolios will make gains if the underlyings move less than 10% in either direction over that time.
Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.
You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?
I look forward to having you on board, and to prospering with you. Terry
The stock market was led, once again, by the financial sector this past week as the financial behemoths, Citigroup, Goldman Sachs and JP Morgan reported better-than-expected first quarter earnings. As a
result, the major indexes finished higher for the sixth consecutive week. The S&P, Dow, Nasdaq and Russell closed the week higher 1.5%, 0.6%, 1.2%, and 2.4%, respectively.
“There has been a slight improvement in sentiment although the road to economic recovery is still long and bumpy,” said Roger Groebli, Singapore-based head of financial market analysis at LGT Capital Management, which oversees about $20 billion. “We’ve probably seen the worst. We won’t come back to
the lows.”
The week began with a 1.3% decline early in the trading day Monday, but was able to rally towards the end of the session to finish in the black. Goldman Sachs used an announcement of a $5 billion common stock offering as an opportunity to report its quarterly earnings a day early. The stock advanced 13.4%
over the prior two sessions, but with the news came a sharp sell-off which brought most of the market lower Tuesday and the S&P eventually closed 2% lower on the day. Goldman lost 11.4% on the day.
As for economic news there were a few notable pieces of data released this past week. The March CPI and PPI were released Tuesday (PPI) and Wednesday (CPI) and both witnessed a surprisingly sharp decline of 3% in energy prices. Although the core rate between the two differed as core CPI increased
0.2%, which marked the third straight month of an advance in the reading.
Separately, the Industrial Production report came in negative for the fifth straight month as it declined 1.5% in March. The IP reading was far worse than the 0.9% economists’ had predicted. So far, output has dropped an annual rate of 20%.
“Businesses look like they are still quite uncertain about the outlook for the economy,” said Zack Pandl, an economist at Nomura Securities International in New York. “These production cuts are still necessary because inventories are still bloated.”
The steady rally off the March lows has been quite impressive in almost every respect - magnitude, breadth and persistence. However, as a result of the stellar performance over the past six weeks the market (S&P 500) has hit an area of strong overhead resistance around the 850-870 area. I expect to see a pullback over the next few sessions, particularly Monday as the day after options expiration is typically weak. Once we see a short-term reprieve then we can reevaluate the situation, but until the major indexes can push back into the neutral range I do not expect to see sustainable gains over the short-term. As for the intermediate-term outlook, it is possible that we could be in an ‘April 2003” scenario where the market continues to defy all logic and continue to move substantially higher as we emerge from this current bear market. I am not ready to go there yet, but a significant push above 870 in the S&P would certainly open me up a little further to the possibility of a repeat of 2003.
Overbought/Oversold as of April 17, 2009