Terry's Tips Portfolio Expiration Report
All Six Portfolios Make Great Gains! The first expiration month using our modified 10K Strategy was a resounding success. In spite of devoting up to half of the entire portfolio value to an exotic butterfly spread that only provided insurance against a big market drop, substantial gains resulted in every portfolio.
The portfolios gained an average of 4.5% after commissions for the expiration month. That works out to be 54% annualized, far more than we expected. We had hoped for a 4% gain in those months where no adjustments were necessary. This month our gains exceeded this goal, and adjustments were made in every portfolio because it was a volatile month, with several market swings in both directions.
The Oil Services portfolio was the best example of the value of butterfly spreads. The underlying OIH fell by 11.3% for the month. In the past, this kind of volatility almost always resulted in large losses. This month, after the addition of a large number of butterfly spreads on the downside, the portfolio managed to gain of 6.4% in spite of the strong slide in the stock price.
Maybe we have indeed created an options strategy that never loses money. That is the ultimate goal of our modified strategy, and the first month's record was most encouraging.
The portfolios that had the greatest gains were the two that had been established before July - Mini-Russell (up 12% for the month) and Oil Services (up 6.4%). The four portfolios that were started in July had to cover the bid-asked spread penalty of a new portfolio, and the final results understate how well they did. Three of these portfolios were in existence for only 23 days, hardly enough to qualify for a month's results.
The lowest-gaining portfolio for the month, Mighty Stalagmite (up 2.6%) would cost about $10,560 to replicate now. This means that a fairer estimate of the gain was probably closer to 5%, and this was our worst-performer (largely because we made several adjustments that were later reversed).
Annualized Portfolio Gains for the August Expiration Month:
Mini-Russell (IWM) - up 144%
Oil Services (OIH) - up 77%
Durable Diamond* (DIA) - up 92%
Building BRIC* (EEM) - up 62%
Rising Russell* (IWM) - up 37%
Mighty Stalagmite (SPY) - up 31%
*Based on three week's results averaged over a year
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Next week we will discuss the economics of using what we call an exotic butterfly spread for downside protection.
Andy's Market Report
Four weeks and 8% higher, the S&P finally decided it was time to take a break. For most traders consolidation was a foregone conclusion. All of the major benchmarks had pushed into a short-term overbought state and strong overhead resistance; two indications that a short-term reprieve was near. However, the higher-beta sectors were having none of it (at least so far) as they continued to surge higher throughout the week. As a result, an interesting divergence has occurred between the major benchmarks which has traders in limbo. How will the market finish out the last remaining days of the summer doldrums?
The Dow, S&P, NASDAQ and Russell 2000 finished mixed -0.6%, -0.1%, 1.6% and 2.1%, respectively.
The continued strength in the dollar weakness in commodities, particularly oil, helped to keep the market afloat for the second straight week. However, the ongoing housing and credit concerns have kept Wall Street in check and in the end could have a much bigger impact on the intermediate to long-term performance for the overall market.
This sentiment was evident in the performance of the financial sector this past week as it moved decisively lower throughout the week. Ongoing credit concerns (more write-downs among investment banks) and brokers slashing earnings estimates helped to keep sellers in control all week. When all was said and done the sector was down -2.8%.
"With some of this sharp price collapse in commodities you would think the market would be up a lot more," said Greg Church, chief investment officer of Church Capital Management. "The underlying factor is that credit continues to appear to be very weak."
The economic news was mixed this week.
The US trade deficit was the key bullish news for the week. The trade deficit unexpectedly shrank in June as a weak dollar stoked exports, offsetting record crude oil imports. It was the second straight month of declines.
"The weak dollar has become a major driver of economic growth," said Joel Naroff of Naroff Economic Advisors.
"The dollar is probably where it should be as it has made US products competitive in a world where global trade is central to economic growth," he added.
However, as I mentioned, not all of the news was positive. Retail sales declined, weekly initial claims increased and the biggest shock was a sharp increase in the CPI.
The highly tracked inflation reading increased a staggering rate of 5.6% and the core rate 2.5%, which has many on Wall Street wondering when the inevitable rate hike will occur. It was fastest rate of year-over year growth in over 17 years.
However, surprisingly the market did not react horribly to the news. Many traders believe that the weakened global growth and the drop in oil prices will help stave inflation in coming months, allowing the Fed to hold off on raising interest rates. "The market believes weak growth and weakened demand will arrest inflation," said Josh Stiles, senior bond strategist at IDEA global in New York. "That's why Treasuries survived that 0.3% increase in core CPI."
One thing is for certain the higher beta indexes (IWM and QQQQ) have pushed into a short-term overbought state while directly under a key area of overhead resistance. Typically this means that a short-term reprieve is close. Will we see the seasonal post expiration blues or will the market consolidate further before the next leg higher?
Seven out of the last eleven years have witnessed a sharp decline during the final week of August so it will be interesting to see how next week sets up before the seasonal end of August weakness arrives. The declines have been substantial with an average loss (during the final five trading days) in the Dow, S&P, and NASDAQ of -2.6%, -2.3%, and -2.1%.
Overbought/Sold Condition Report
Overbought/Oversold for August 15, 2008
Major Benchmarks - Dow (DIA) - 56.3 (neutral)
- S&P 500 (SPY) - 62.6 (neutral)
- Russell 2000 (IWM) - 72.1 (overbought)
- Nasdaq 100 (QQQQ) - 76.6 (overbought)
- Emerging Markets (EEM) - 32.9 (neutral)