There are no “sure things” in the financial markets.  But there sure are “things”. Two of those “things” are:

1. With the exception of the Nasdaq Index, and for whatever reason, the month of June is often (though not always) unkind to the stock market.

2. Certain sectors have shown a definite tendency to under perform during the sixth month of the year.

So when it comes to investing during the month of June, consider this as the “How Not To” lesson.

Five Sectors to Avoid during June

Figure 1 displays the results generated by investing in 5 Fidelity Select Sector funds ONLY during the month of June each year since fund inception.

Figure 1 – 5 Funds to Avoid in June

It is important to note that it is not like any of these funds are “guaranteed” to decline in value simply because it happens to be the month of June.  But the long-term results argue strongly in terms of steering clear.

Figure 2 displays the annual June results achieved by trading all of the funds listed in Figure 1.

Figure 2 – June %+(-) for all 5 funds combined

Figure 3 displays the cumulative growth of $1,000 invested in these funds ONLY during the month of June every year.

Figure 3 – Growth of $1,000 invested in  5 Sector funds from Figure 1 ONLY during the month of July

Summary

How will the funds listed in Figure 1 perform in the month ahead?  The truth is that there is no way to know in advance.  Remember that in 1999 these 5 funds combined roared ahead +9.9% during the month of June, so like I said at the outset, there are no “sure things”.  Also, given that 8 of the last 10 June’s have seen this combined Gang of 5 decline it might be argued that they are “due” for an “Up June.”

Still, the real question is this: based on the results displayed in Figures 1 through 3, does it make sense to find out with real money on the line?

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Trading successfully over an extended period of time is not easy. Period.  It takes investment capital that can be risked, a money management plan, a method for deciding when to enter a trade, criteria for when to exit with a profit, criteria when to exit with a loss and the emotional and financial wherewithal to do all of the above over and over again without letting fear and/or greed insinuate themselves in any of the above.

No, it’s not easy.  Then again sometimes it’s not that hard.

Here is one such scenario:

*A security makes a low

*It then rallies over some period of time

*Then price eventually works its way back down to that original low

*Maybe it doesn’t quite touch the original low, or maybe it touches the original low and then bounces, or maybe it breaks down briefly through the original low and then reverses back to the upside

*At the same time, any number of other technical indicators are making a higher low than they did at the time of original low in price, thereby setting up what we “technical analyst types” refer (glowingly) to as a “bullish divergence”.

*Oh, and if everybody hates the underlying security in question, and has pretty much given up on it and thrown in the towel-even better.

Of course not every routine “bullish divergence” pans out as a good trading opportunity.  But if you pay close enough attention, every once in awhile the market “lobs one in.”

Consider long-term treasury bonds.

Long-Term Treasury Bonds

There is great fear and loathing regarding long-term bonds these days. And not without good reason. As I highlighted in Figure 3 of this article, chances are good that we are in the relatively early stages of a long-term advance in interest rates. If this scenario does pan out there is a lot of pain in store for holders of long-term treasuries.

But every dog has its day. Or week.  Or month.  Or Whatever.

Figures 1 below shows a weekly chart of ticker TLT – an ETF that tracks the 20+ year Treasury bond.  As you can see, it’s been an awful performer in recent years.  In addition, a lot of people have gotten the memo that interest rates are likely in a new long-term rising trend and long-term bonds have become one of the least loved investments.

(click to enlarge)Figure 1 – Ticker TLT Weekly successfully tests support

Still, funny how things work sometimes.  On 5/17, TLT broke down through the upper support line drawn in Figure 1.  On the very next day, it reversed and closed back above that support line.  At the same time a host of indictors generated bullish divergences.  See Figures 2 through 5.

(click to enlarge)

Figure 2 – TLT support reversal with MACD Oscillator bullish divergence (Courtesy AIQ TradingExpert)

(click to enlarge)

Figure 3 – TLT support reversal with Commodity Channel Index (CCI) bullish divergence (Courtesy AIQ TradingExpert)

Figure 4 – TLT support reversal with TRIX Differential bullish divergence (Courtesy AIQ TradingExpert)

Figure 5 – TLT support reversal with 3-day RSI bullish divergence (Courtesy AIQ TradingExpert)

So here is the relevant question – Is it that hard to recognize this as a bullish trading opportunity?

The answer is: “Yes, if you had convinced yourself that bonds are in a long-term bear market and that all hope was lost” (as a majority of investors had done).  On the other hand, if you looked at this setup objectively it was clearly not that hard to recognize.

Now, did all of this imply that “the coast is clear” and that the long term fundamentals for bonds had changed at that it was time to load upon long-term treasury bonds?  Not at all.

From a trading perspective, however, instead of loading up on actual treasury bonds, or funds or ETFs consider the trader who bought a slightly out-of-the-money September 118 call for $223.  As you can see in Figure 6, six trading days later this option was up +129%.

(click to enlarge)Figure 6 – Risk curves for TLT Sep2018 118 strike price call (Courtesy www.OptionsAnalysis.com)

Summary

Fear and greed are universal.  Once something goes too far in one direction, investors often “tune out” that security and assume it can only be traded in the “agreed upon” direction (i.e., in this case bonds had/have nowhere to  go but down).  And in so doing they close their eyes to potential opportunities, which often are hiding in plain sight.

While I am a huge advocate of “trend following”, it is important to remember that shorter-term trading opportunities are everywhere.  And as we just saw with the case of bonds:

*Opportunities often occur where you least expect them

*The setup is often fairly obvious (if one is open to seeing it)

*The difficulty in taking advantage of said opportunities lies mostly between our own ears.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

For the record, I am not good with predictions – particularly when they involve the future.  That being said, I am pretty good at identifying trends.  There are a couple of “new (old)” trends that most investors have trained themselves to ignore during the great bull markets in stocks and bonds over the past several decades.

From the looks of things, it might be a good time to at least reacquaint oneself with these “new (old)” trends.  Because – at least hypothetically – if these play out as it looks they might there may be a singular investment opportunity.

Part 1 – Commodities versus Stocks

Figure 1 display a chart of the Goldman Sachs Commodity Index (GSCI) divided by the S&P 500 Index (SPX).Figure 1 – Goldman Sachs Commodities Index (GSCI) divided by S&P 500 Index (SPX); (Source: Dr. Torsten Dennin, Incrementum AG)

As you can see, the ratio makes some big swings. When the ratio is rising commodities are outperforming stocks and vice versa. To get a sense of the magnitude of the price movements of commodities and stocks during the course of these swings, peruse Figure 2 which displays the performance of both indexes from extreme to extreme displayed in Figure 1.Figure 2 – GSCI Performance vs. SPX Performance between GSCI/SPX Ratio peaks and valleys

During rising GSCI/SPX ratio:

The average gain for the GSCI Index was +269.9%

The average gain for the S&P 500 Index was +12.7%

During declining GSCI/SPX ratio:

The average loss for the GSCI Index was (-32.7%)

The average gain for the S&P 500 Index was +207.2%

The price swings tend to be very big and very different – i.e., typically stocks go up a lot and commodities do not or vice versa.  Note that the GSCI/SPX ratio appears to have bottomed in June of 2017.  Does this guarantee that commodities are “In” and stocks are “Out”?  Not necessarily.  Still, the numbers displayed in Figure 2 suggest that that might be the way to bet in the years just ahead.

So the implication of Part 1 of my hypothesis is that commodities will outperform stocks over the next 3-8 years.

Part 2 – A Rising Interest Rate Environment

Figure 3 displays a chart from www.McClellanOscillator.com that highlights the trend in High Grade Corporate Bond Yields since 1740 (Yes, 1740).

Figure 3 – 60-Year Interest Rate Cycle (Source: www.McClellanOscillator.com)

Notice the trend? Roughly 30 years of declining interest rates followed by roughly 30 years of rising interest rates.  The most recent completed (apparently) move was a 30 year downtrend in rates from 1981 into 2011. Since then rates have drifted sideways and of late have moved higher.  Clearly history strongly suggests that we have now entered the next rising rate trend.

So the implication of Part 2 of my hypothesis is that interest rates will trend higher in the years ahead.

The Hypothesis

So the information above argues in favor of rising commodity prices and rising interest rates.  Most investors will dismiss the possibility – based primarily on their experience over the past 30+ year (i.e., rising stock prices and falling interest rates).  But nothing lasts forever, especially in the financial markets.  For the record, we saw rising commodity prices and rising interest rates in the late 1970’s, early 1980’s (and also for the record, at the time virtually nobody could envision those trends ending and reversing the way they did over the ensuing decades).

So let’s for a moment assume that this hypothesis is correct: Rising commodity prices and rising rates.  So where is the place to be?

I almost hate to blurt it out because the answer is one of the most sleep-inducing phrases in all of investing.  But here goes:

The Case for Base Metals

Few phrases in the investment world lexicon can make an investor’s eyelids as heavy, or more quickly prompt an individual to click “Exit” than the phrase “Base Metals.” (DO NOT STOP READING!). We’re not even talking the “sexy” stuff like gold and silver.  We’re talking instead about unspeakably boring stuff like Zinc, Copper and Aluminum.

Base Metals in a Rising Rate Environment

I recently was fortunate enough to witness a presentation by Mark Eicker, Chief Investment Officer for Sterling Global Strategies, titled “Commodities Shine When the Fed Hikes Rates”.  In this extremely enlightening presentation Mark highlighted the performance of a number of different investment categories during periods when the Fed is actively raising rates.  Figure 4 displays those periods tested.Figure 4 – Periods of Rising Interest Rates (Source: Mark Eicker, Sterling Global Strategies)

Figure 5 displays the performance of 7 different asset classes during these rising rate periods.  Commodities are the largest, most consistent gainer during these periods.  The asset classes include:

*U.S. Dollar

*U.S. Equities

*U.S. Treasuries

*U.S. Credit (corporate bonds)

*International Equities

* Gold

*Commodities

(click to enlarge)Figure 5 – Asset class performance during rising rate environments (Source: Mark Eicker, Sterling Global Strategies)

A close look at Figure 5 reveals that “Commodities” as an asset class was by far the best performer (median gain = +17.3%).

Now let’s look closer at “Commodities” and break them into different groups. Figure 6 displays the average annualized daily returns during a rising rate environment for 5 different commodity “categories”, including:

*Base Metals

*Energy

*Precious Metals

*Livestock

*Agriculture

                             (click to enlarge)

Figure 6 – Annualized Returns for commodity “categories” during rising rate environment (Source: Mark Eicker, Sterling Global Strategies)

As you can see in Figure 6, in a rising rate environment, base metals have gained at an annualized rate of 50%. This is significantly higher than the “darling” of the commodity world – Energy – which came in at 28%.

Summary

Are commodities guaranteed to rise in the years ahead as suggested in Figure 1?  Not necessarily.  Figure 1 suggests only that commodities will outperform stocks over the next several years.  However, the figures in Figure 2 DO seem to suggest that higher commodity prices are a decent bet.

Are interest rates sure to rise in the years ahead – as suggested in Figure 3?  Nothing is ever guaranteed in the financial markets.  Still, the information displayed in Figure 3 suggests that that is the way to bet.

So if commodities are going to rise and if interest rates are going to rise, can we be sure that base metals will be a top performer?  Again, there are no sure things in investing.  Nevertheless, the information in Figures 4 through 6 suggest that base metals might be a good place to look.

I not make recommendations here at JayOnTheMarkets.com.  I just comment on what (I think) I see (and you can never be too sure about the ramblings of a market-addled mind). But just to finish the though process here, ticker DBB is an ETF that holds a portfolio of zinc, copper and aluminum.  As you can see in the bottom clip in Figure 7 below, DBB appears to have put in a double bottom in 2016 and has been mostly rising ever since.  The top clip in Figure 7 displays ticker TNX, an index that tracks the yield on the 10-year treasury (x 10).  You can see the correlation between the two.  This suggests that if rates continue to rise in the years ahead, DBB will as well.Figure 7 – 10-Yr. treasury yields (Ticker TNX; top clip) and Base Metals (Ticker DBB; bottom clip)

But like I said earlier, I am not too good at making predictions.  Still, what we’ve really done here is put together the astute analysis of Dr. Torsten Dennin, Tom McClellan and Mark Eicker.

Pssst, I think they may (each) be onto something.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

The energy sector – not just unloved, but pretty much reviled not that long ago – is suddenly everybody’s favorite sector.  And why not, what with crude oil rallying steadily in the last year and pulling pretty much everything energy related higher with it?

Anecdotally, everything I read seems to be on board with a continuation of the energy rally. And that may well prove to be the case. But at least for the moment I am waiting for some confirmation.

Two Concerns

The first – which I mentioned in this article – is the fact that the best time of year for energy is the February into early May period.  See Figure 1.Figure 1 – Ticker XLE Seasonality (www.Sentimentrader.com)

With that period just about past it is possible that the energy sector may at least pause for a while.

The second concern is that a lot of “things” in the energy sector are presently “bumping their head” against resistance.  Here is the point:

*This does not preclude a breakout and further run to higher ground.

*But until the breakout is confirmed a little bit of caution is in order.

I created an index comprised of a variety of energy related ETFs. As you can see in Figures 2 through 4 that index recently was turned away at a significant resistance level.

Figure 2 shows a monthly chart of the index.Figure 2 – Jay’s Energy ETF Index – Monthly (Courtesy AIQ TradingExpert)

Figure 3 shows the same information on a weekly chart.Figure 3  – Jay’s Energy ETF Index – Weekly (Courtesy AIQ TradingExpert)

Figure 4 zooms in to view the action on a daily basis.Figure 4  – Jay’s Energy ETF Index – Daily (Courtesy AIQ TradingExpert)

As you can see in Figure 4, the index made an effort to break out above the January high then reversed and closed lower before declining a little bit more the next day.

The action displayed in the charts above may prove to be nothing more that “the pause that refreshes.” If price breaks out to the upside another bull leg may well ensue.  But note also in Figure 5 that ticker XLE – the broad-based SPDR Energy ETF – demonstrated the same type of hesitation as the ETF Index in the previous charts.

It too faces it’s own significant resistance levels as seen in Figure 5.Figure 5 – Ticker XLE faces resistance  (Courtesy AIQ TradingExpert)

Summary

Energies have showed great relative strength of late even in the context of a choppy stock market overall.   So there is no reason to believe that the rally can’t continue. But two things to watch for:

1. If energy related assets clear their recent resistance levels a powerful new upleg may ensue.

2. Until those resistance levels are pierced, a bit of caution is in order.  Energy has been the leading sector of late.  Any time the leading sector runs into trouble it pays to “keep an eye out” for trouble in the broader market.

No predictions one way or the other – just some encouragement to pay close attention at a potentially critical juncture.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

The question posed in the title is essentially, “does the fate of the stock market hinge on the action of Sotheby’s Holdings” (ticker BID)?  Sotheby’s is the oldest stock on the NYSE and is the only publicly traded investment opportunity in the art market.  As the art market is highly sensitive to the overall economy it has been argued that BID is a potential stock market “bellwether”.

Still, the most obvious answer to the question posed above is of course “No.”  Of course the performance of the whole stock market does not come down to the performance of one stock.  That’s the obvious answer.

The more curious answer is arrived at by first looking at Figure 1.  Figure 1 displays a monthly bar chart for BID in the top clip and the S&P 500 Index in the bottom clip.  What is interesting is that historically when BID tops out, bad things tend to follow for the broader stock market.Figure 1 – BID tops often foreshadow SPX weakness (Courtesy AIQ TradingExpert)

Consider:

*The bear market of 2000-2002 was presaged by a dramatic top for BID in 1999, and confirmed again in late 2000.

*The great bear market of 2008 was also preceded by a top and breakdown in BID.

*The 2011 top in BID was followed by a quick but sharp -21% SPX decline.

*The 2013-2014 BID top was followed by roughly 2 years of sideways SPX price action.

*More recently the top in 2017-2018 top has been accompanied by much volatility and consternation in the broader market.

Figure 2 “zooms in” to recent years using weekly data.Figure 2 – BID Weekly chart (Courtesy AIQ TradingExpert)

In Figure 2 we can see how poor performance for BID presaged an extended period of sideways trading for the SPX.  At the far right we can also see that BID is at something of a critical juncture.  If it punches through to the upside and moves higher it could be something of an “All Clear” sign for the market.  On the other hand, if BID fails here and forms a clear multiple top, well, history suggests that that might be an ominous sign for the broader market.

Other Bellwethers

BID is one of four market “bellwethers” that I like to monitor.  The other 3 are SMH (semiconductor index), TRAN (Dow Transports) and ZIV (inverse VIX).  You can see the status of each in Figure 3.

Figure 3 – Four stock market “Bellwethers” (Courtesy AIQ TradingExpert)

To sum up the current status of these bellwethers:

*All 4 (including ZIV as of the latest close) are above their respective 200-day moving average.  So technically, they are all in “up trends.”

*All 4 are also threatening to create some sort of topping formation.

In sum, as long as all four of these bellwethers continue to trend higher, “Life is Good” in the stock market.  At the same time, if some or all of these fail to break through and begin to top out, the broader market may experience more trouble.

Bottom line: Now is a good time to pay close attention to the stock market for “tells”.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

OK I suppose it would have been helpful to highlight this one a little sooner, but since the purpose of this blog is to “educate” and not to “prompt trading actions” I guess anytime is a good time, right?

Fidelity Select Biotech fund (ticker FBIOX) stocks bounced off of a low in April after falling 18% in less than a month. So far in May it is up almost 6%.  An investor aware of the seasonal tendencies in biotech stocks would not be surprised by this development.  For as it turns out, May, June and July are often (although importantly, not always) something of a “sweet spot” for biotech stocks.

FBIOX Spring into Summer

Figure 1 displays the growth of $1,000 invested in FBIOX only during the months of May, June and July every year since the fund started trading in 1986.Figure 1 – Growth of $1,000 invested in FBIOX during May, June and July; 1986-2017

Figure 2 displays the year-by-year results.

Figure 2 – Year-by-Year FBIOX May-July %+(-)

Figures to note regarding FBIOX during May through July from 32 years of data:

*UP 20 times (63% of the time)

*DOWN 12 times (37% of the time)

*Average Up = +13.4%

*Average Down = (-6.7%)

*Median Up = +13.7%

*Median Down = (-5.0%)

*Maximum Up = +22.9% (1999)

*Maximum Down = (-18.3%) (2002)

Summary

Clearly biotech stocks have “tended” to perform well during this time of year.  Yet, it is also clearly not a “sure thing” and as the 2002 results highlight, there is always risk in the markets.

The purpose of this article is not to try to induce you to buy biotech stocks.  The purpose is to highlight;

Jay’s Trading Maxim #27: Long-term investment success is not about finding “sure things” but about finding a slight edge here and there and exploiting it ruthlessly and repeatedly.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

I’m going to be candid. If you are not into options there is a possibility that what follows may leave you a bit overwhelmed.  On the other hand, there is also a possibility that you may learn something. So there’s that.  In any event, what follows is a fairly lengthy (at least by my standards) dissertation on one way to screen for options to trade.  So if you have no interest whatsoever in options trading – Class Dismissed, Thank You for checking in, and please check back soon.

The “Best” Approach to Trading Options

Based on many years of experience I believe that the “best” approach to trading options is to devise a timing mechanism that does a terrific job of identifying stocks that are about to rally strongly over the next 5 trading days and to buy call options on those stocks to maximize your gains (Sadly, I have yet to devise such a timing mechanism myself.  If you have had more success with that I would love to hear from you). Barring that, you will likely have to throw in with the rest of us “option schlubs” and try to develop a method to help pull some type of order from the chaos of fear and greed.

“Another” Approach to Options

IMPORTANT: What follows is NOT intended to represent the “definitive” approach to trading options.  In fact, to make matters worse, I can make no guarantees that the steps that follow will generate profits on any given trade or set of trades.  The purpose is simply to attempt to remove some of the emotion from the decision-making process by using a common sense approach to screening for factors that might help lead to potentially favorable opportunities.

Step #1: Identify a broad market buying opportunity.

We are not talking “precision market timing” here.  For this step we will simply look for a pullback in an uptrend by the broader market.  For our example we will use an indicator I refer to as TMOsc2 (“TM” because I think either picked this up from Tom McClellan of The McClellan Oscillator or I developed it based on something else he wrote about – I can’t remember which).  Looking at the S&P 500 Index, a “buy” signal occurs when TMOsc2 drops to 48 or below and then reverses up for one day while SPX is above its 200-day moving average.

For the record, alot of other overbought/oversold type of indicators could be substituted.Figure 1 – TMOsc2 buy signals for SPX (Courtesy AIQ TradingExpert)

Step #2: Screen for stocks with active options trading and tight bid/ask spreads.

From here on we will use www.OptionsAnalysis.com.  Figure 2 displays an input screen that will generate a scan of all optionable stocks and ETFs with:

a) 1,000 options traded per day and,

b) option bid/ask spreads of 1% of the stock price or less.Figure 2 – Screening for minimum 1K options traded and maximum 1% bid/ask spread (Courtesy www.OptionsAnalysis.com)

Figure 3 displays the output.  This screen found 72 stocks that meet our criteria.  We save these 72 tickers to a list called My Stock List.Figure 3 – 72 stocks meet the initial volume and bid/ask screen (Courtesy www.OptionsAnalysis.com)

Step#3: Screen the remaining list for stocks in an uptrend.

Figure 4 displays an input screen for a routine that will screen for stocks that are trading above their 200-day moving average.

Figure 4 – Looking only for stocks that are trading above their 200-day moving average (Courtesy www.OptionsAnalysis.com)

Figure 5 displays the output.  As you can see 51 of the original 72 stocks are above their 200-day moving average.  We save those 51 remaining stocks to My Stock List.

Figure 5 – List of stocks above 200-day moving average (Courtesy www.OptionsAnalysis.com)

Step #4: Look for stocks with relatively low implied volatility.

We want to limit the amount of time premium we pay to buy options.  Implied volatility can help to tell us if IV is high or low for a given security.  In Figure 6 we see a Saved routine to scan a list of stocks for Low IV.

Figure 6 – Screening for stocks with low implied volatility (Courtesy www.OptionsAnalysis.com)

For our purposes, a reading of 0 means implied volatility is at the low end of its recent range and a reading of 100 means implied volatility is at the high end of its recent range.  Figure 7 displays the output.  For our purposes we want to find those stocks with an IV rank of 25 (technically I use 25.99 as an upper limit) or less. As you can see in Figure 7, in this case only 5 stocks pass the screen (the number of securities that pass this screen can vary greatly depending on whether overall market volatility is high or low).  We once again overwrite My Stock List with just these 5 tickers.

Figure 7 – List of stocks with low IV (Courtesy www.OptionsAnalysis.com)

So now we have a very short list of stocks with:

a) Price in an uptrend

b) Reasonably active option trading

c) Relatively “cheap” options, i.e., low implied volatility

From here an ambitious/skilled trader might apply their own methodology (chart reading, trend-following techniques, etc.) to identify which of the remaining stocks they think are more likely to rally.  For our purposes, let’s continue with a more “agnostic” approach.

Step #5: Look for option positions with certain favorable characteristics.

Figures 8 and 9 display input screens for buying call options on the 5 remaining stocks.Figure 8 – Buy Call option inputs (Courtesy www.OptionsAnalysis.com)

Figure 9 – Buy Call option inputs (Courtesy www.OptionsAnalysis.com)

There is nothing “sacred”, “magic” or “guaranteed” about the criteria that appear here. They serve merely as “common sense examples.”  Note that we are looking for options with:

a) At least 45 days left until expiration

b) Option volume and open interest greater than 0

c) A “Delta” of 60 or higher (this may seem “high” to some traders, however, in this example we are looking at using more a stock replacement strategy – i.e., the option price moves closely with the stock price – rather than trying to maximize leverage by buying out-of-the-money calls.

(NOTE: If the option prices for the output trade are exceptionally high, a trader might also consider scanning for vertical bull call spreads that buy a lower strike price call and sell a higher strike price call.)

Ultimately, we will sort the output trades by:

a) Identifying the Top 10 trades ranked by Expected profit/(-Risk)

b) Among the Top 10 trades we will look for the highest Gamma

Figure 10 displays the output screen.Figure 10 – Buy calls output screen (Courtesy www.OptionsAnalysis.com)

The list that appears in Figure 10 displays the Top 10 trades sorted by Expected Profit/(-Risk).  Among these trades, the one with the highest Gamma is highlighted.

Figure 11 displays the trade details and risk curves for the highlighted trade.Figure 11 – WLL May30 call (Courtesy www.OptionsAnalysis.com)

With WLL trading at $33.84 a share, this trade involves buying the in-the-money May 30 call for $5.13.

*The maximum risk is $513 per contract

*The breakeven price is $35.13

*Profit potential is unlimited above $35.13

Step #6. Develop a Trade Plan.

This plan will answer the following questions:

a) How much $ to commit to the trade

b) When to exit with a loss

c) When to exit with a profit, or adjust the trade to lock in a profit

Figure 12 displays the subsequent price action for WLL.  In this example, WLL rallied from $33.84 to over $48 a share.Figure 12 – Price action for WLL after call trade initiated (Courtesy www.OptionsAnalysis.com)

Figure 13 displays the updated risk curves for the WLL option trade.Figure 13 – Updated risk curves for WLL trade (Courtesy www.OptionsAnalysis.com)

For the record, NO not every trade works out nearly as well as this one.

Summary

What you have just seen is NOT the “best” way to trade options.  It is merely an example of “one way” to trade options.  Hopefully this review of one “objectively subjective” approach will help you to focus your own trading.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

If there is one thing that I am not very good at, it is “picking tops and bottoms with uncanny accuracy.”  While I feel bad about this at times I do take some comfort in the knowledge that no one else is either (regardless of what you might be told).  Still, there can be times when it can make sense to try.  Like now for instance.

Figure 1 displays ticker IWM – an ETF that tracks the Russell 2000 small-cap index.

Figure 1 – Ticker IWM (Courtesy AIQ TradingExpert)

Because I am not good at ”predicting” things I cannot tell you if this will turn out to be an actual triple top or not (for the record, most of the stuff I follow is still bullish on the stock market overall).  But I do know one thing – this is what a triple top looks like.

I also know:

*The “Best Six Months” period of the year is over and this part of a mid-term year has been “dicey” in the past

*The best part of the election cycle starts on 10/1/18

So what if an investor was concerned that the market is topping out right here and fears that something “nasty” might happen between now and the end of September?  What can be done?

IMPORTANT:  What follows is NOT a “recommendation”. It is simply one example of one way to play given the criteria discussed above.

One simple approach might be to buy the IWM September 28 159 put.  The particulars appear in Figure 2 and the risk curves appear in Figure 3.Figure 2 – IWM Sep 159 put (Courtesy www.OptionsAnalysis.com)

Figure 3 – IWM Sep 159 put risk curves (Courtesy www.OptionsAnalysis.com)

*The option costs $550 to buy, which represents the maximum risk if IWM rallies instead of declines.

*The breakeven price is $153.50 per IWM shares

*If IWM declines 1 standard deviation to roughly $147.82 a share the option will generate a profit of $590 to $710 depending on how soon that price is hit.

*If IWM declines 2 standard deviations to roughly $137.00 a share then the option will generate a profit of roughly $1,640.

Summary

Is IWM forming a triple top?  Will betting on the downside payoff?  Sorry folks, I have to go with my standard answer here of “It beats me.”  Besides, the odds of me picking the top or bottom in anything to the day are pretty long, so please do not consider this a prediction.

Still the point is that if one is concerned about such a possibility and wanted to hedge against it, options offer a pretty simple way to do it.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

On 5/9/18 I wrote this article  regarding ticker URA – an ETF that tracks the price of uranium.  For the record that article was more about the particular type of price action (almost 3 years of sideways range bound price action) than URA itself.

I mentioned in that article that what attracted my attention was the form of the price action and the observed tendency for that pattern to  be followed ultimately by an upside breakout and often a significant price move.

I also mentioned that I knew nothing about the fundamentals regarding uranium the actual commodity.  Well for the record, now I do thanks to the article linked below.  The author of that article (Caleb Jensema) also seems to expect an ultimate advance in price based on the fundamentals of supply and demand that he spells out in his article.

Please see URA – The Nuclear Option for a discussion of the fundamentals of uranium.

Summary

So in a nutshell, one author likes URA based solely on technical factors and one author likes URA based solely on technical factors.

Does that mean URA is a “Buy” and that a huge move is sure to  follow?  Not at all.

But it might be one to keep an eye on.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

In the last year I became very drawn to some of the metals markets, as well as mining stocks (See here, here and here.  What caught my eye was a narrowing, consolidating trend in gold, silver, gold stocks, silver stocks, etc.  Of course, it also (finally) dawned on me that this kind of action can go on for quite a while (and it has).

In Figure 1 you can see this “narrowing” for yourself.  As I wrote about here, extended “going nowhere” activity is often (though not always) followed by a significant breakout to the upside.

Figure 1 – Metals and Miners “coiling” (Courtesy AIQ TradingExpert)

Looking at Silver

For better or worse I can’t seem to get the idea out of my head that silver is going to break out in a big way to the upside at some point.  However, at this moment I am trying to remain patient.  To understand why consider Figure 2 below, which displays the results generated by holding long one silver futures contract every year starting in 1973 ONLY during the months of May and June.

Figure 2 – Long silver futures during May and June (1973-2017)

Figure 2 is clearly not a “pretty picture”.  That being said it should be noted that silver in May and June combined:

*Actually made money 23 times

*Lost money 22 times

*But the average gain was +$3,878

*While the average loss was a whopping (-$9,061)

So one could accurately state that silver goes up more often than it goes down during May and June.  That would be the Good News.  The Bad News is clearly visible in Figure 2.

Summary

Bottom line: Silver could very well explode to the upside at some point soon.  And it is not like silver can’t rally during May/June.

Just remember that when it’s good, it’s OK, and when it’s bad, it’s very bad.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.