Weekly Futures Recap With Mike Seery

Silver Futures

Silver futures in the December contract ended the week on a sour note down $0.42 at 17.75 after settling last Friday at 18.11 an ounce as prices are near a 3 week low. I have been recommending a bullish position over the last several months from the 14.93 level originally in the September contract as it is time to exit and move on as prices are right near a 3 week low as the trend in the short-term has changed.

Silver futures are trading below their 20-day but still above their 100-day moving average as all the interest has come back into the U.S stock market which is right near another all-time high as money flows are entering equities and out of the metals.

If you are a longer-term investor, I would still hold on to silver as I still believe prices are cheap historically speaking as this is just the pullback as I will not take a short position as I think the downside is minimal.

I do not have any recommendations in the precious metal as I think this is a pause as we will probably witness a consolidation over the next couple of weeks, but I still believe prices will head into the $20 range come year-end, but it is time to move on and exit.

TREND: MIXED
CHART STRUCTURE: POOR
VOLATILITY: HIGH

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Market Management 101: Balance

I cannot profess to tell others how to effectively manage their accounts because I am a lowly participant who is learning all the time. The truth is that 2019’s learning is much different than 2018’s learning was, which was different than 2016, 2011, 2008/2009 and other pivotal market phases. So I’d say that the biggest lesson to learn has been the concept of marrying adaptability with discipline.

Cookie-cutter advisors and brokers have it easier. They’re the majority of market professionals and they’ve learned and set in stone the way of allocating into markets; 60/40 stocks to bonds or some such variant. But for something more effective than ‘cookie-cutter’, you need to keep learning, adapting and holding discipline as long as your signals remain valid.

As for the current situation and speaking personally, it usually does not work out like this, especially when anticipating a corrective phase in the precious metals. The way it usually works is that I underestimate the intensity of a correction that I am pretty sure is coming and either I don’t sell quite enough, don’t hedge correctly (timing-wise) or don’t balance the portfolios optimally, even if the balancing seemed logical at the time it was undertaken. Often that is because the last market situation is not going to be like the next one. Automatic, cookie-cutter thinking need not apply. Adaptability.

Well somehow today, with gold and silver stocks way off their highs (and GDX & GDXJ painting bogus looking engulfing candles) I am right at my personal portfolio’s value highs for the year despite 2019’s best trade having topped out a couple weeks ago. That is due to some combination of… Continue reading "Market Management 101: Balance"

New Highs On The Horizon

Hello traders everywhere. Once again we are on the verge of new all-time highs for both the S&P 500 (3,027.98) and DOW (27,359.16) as both indexes along with the NASDAQ will post their third straight week of gains. Even though the markets overall will end the week mixed on a daily level, all three indexes will end the weeks with gains of +1.1%, +1.6%, and +1.2% respectively.

Will we see record highs on Monday when trading opens?

Crude oil is going to post a weekly loss of roughly -2.8% as trading closes Friday. This drop is a reflection of how fears of excess supply continue to keep crude prices down even as hopes for coming trade talks boost the outlook for the global economy. And although oil prices have rebounded this year, they are down about 20% in the past year, compared with a nearly 4% climb in U.S. stocks.

Bitcoin continues to disappoint as it's trapped below the $11k market and after posting a weekly gain of +9% last week it gave back a bit of that move this week losing -1.8% trading just above the $10k level at $10,300 right below its 50-day MA. We will need to see a move above $10,949.00 for a potential breakout and move higher.

Key Levels To Watch Next Week:

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Iraq Only Pays Lip Service To OPEC Agreements

Iraq is OPEC’s second-largest producer, and its production in August was 4.88 million barrels per day, according to Platts, and 4.76 according to Reuters. Its production target is 4.512, and so it is producing around 220,000 b/d more than it had pledged.

OPEC
Source: Reuters

By contrast, Iran’s production has fallen by 1.6 million per day since the October 2016 base period, and Saudi Arabia cut its output by 920,000 b/d. Moreover, according to Majid Jafar, CEO of Crescent Petroleum, the largest private oil company in the region, it is “doubling down” on its investment in Iraq and intends to increase its production there. Continue reading "Iraq Only Pays Lip Service To OPEC Agreements"

There's No Edge In Stock Picking

Those that subscribe to the efficient market hypothesis believe that there’s no edge or advantage when it comes to picking stocks. Thus, stock-picking is a binary event and boils down to a 50/50 probability or simply chance. Everything that can be possibly known about a stock is known, and all the available information, technical analysis, and fundamental analysis is priced into the underlying stock price. The efficient market theory may be the Achilles heel of professional money managers’ performance and their inability to outperform their benchmarks. A staggering 92% of actively managed funds do not outperform their benchmark hence the massive inflows into passive index investing and ETFs.

Furthermore, when looking at The Russell 3000 Index over a 26-year timeframe (1983 to 2006) which comprises the largest 3000 U.S. companies, 39% of stocks were unprofitable investments, 64% of stocks underperformed the Russell 3000 and 25% of stocks were responsible for all the market’s gains. Taken together, only 36% of stocks outperformed the Russell 3000 index. If the efficient market theory is correct, is stock picking a useless endeavor? If stock-picking boils down to chance, is there a strategy that places the statistical odds of success in one’s favor?

Efficient Market Hypothesis

Markets aren’t always functioning efficiently. Markets can be irrational and become overbought or oversold. Outside of these extremes, however, markets are efficient, and over the long-term the vast majority of actively managed funds are unsuccessful at beating their benchmarks. Everything that can possibly be known about a stock is known, and there’s no edge in stock picking. As of Q1 2019, for the ninth consecutive year, the majority (64.5%) of large-cap funds lagged the S&P 500 last year. The longer the timeframe, the weaker the performance, after 10 years, 85% of large-cap funds underperformed the S&P 500, and after 15 years, nearly 92% are underperforming the index (Figures 1 and 2). These dismal results hold true across large-cap, mid-cap, and small-cap funds. Even if these actively managed funds happen to outperform their index, it’s due to chance, and this margin of outperformance is primarily negated by hefty management fees, rendering stock-picking useless. To further emphasize this point, for the Russell 3000, 39% of stocks were unprofitable investments, 64% of stocks underperformed the index, and 25% of stocks were responsible for all the market’s gains. Taken together, only 36% of stocks outperformed the Russell 3000 index.

Stock Picking

Stock Picking

Figures 1 and 2 – Time based underperformance of actively managed funds relative to the S&P 500 (Active Fund Managers Trail S&P 500)

Stock Picking

Options
Figures 3 and 4 – Data summarizing the performance of individual stocks relative to the Russell 3000 index. Highlighting the fact that only 36% of stocks had a higher return than the index and 25% of stocks accounted for all of the market’s gains. (The_Capitalism_Distribution)

Even Distribution of Returns

If the fact that 92% of actively managed funds do not outperform their index and that only 25% of stocks accounted for all the market’s gains wasn’t compelling enough, the distribution of returns also supports the efficient market hypothesis. The S&P 500 moves in a standard distribution over time, the number of daily moves is evenly distributed. There’s an equal and even number of days where the market moved up 0.6% as it moved down 0.6% (Figure 5). The market has fluctuated between a 2% loss and a 2% gain 94% of the time. Markets move in a standard distribution over time; there is no pattern or predicable cycles over the long-term which renders stock picking to random chance or a 50/50 probability. Interestingly, the market does move up over time due to positive skew in these data attributable to the fact that indexes are capitalization-weighted. This means that successful companies receive larger weightings in the index. Conversely, unsuccessful companies receive smaller weightings and are inevitably removed from the index. This disproportionally favors successful, growing companies hence the fact that only 25% of companies account for all the market gains.

Options
Figure 5 – Standard distribution of daily market moves of the S&P 500 for 65 years

Options Provide Statistical Edge

The only way to consistently and reliably profit from this even distribution and market behavior is via options trading. Options trading allows one to profit without predicting which way the stock will move. Options trading isn’t about whether or not the stock will move up or down; it’s about the probability of the stock not moving up or down more than a specified amount. Options allow your portfolio to generate smooth and consistent income month after month without predicting which way the stock market will move. Options are betting on where stocks won’t go, not where they will go. Running an option-based portfolio offers a superior risk profile relative to a stock-based portfolio while providing a statistical edge to optimize favorable trade outcomes. Options trading is a long-term game that requires discipline, patience, time, maximizing the number of trade occurrences and continuing to trade through all market conditions. Put simply; an options-based approach provides a margin of safety with a decreased risk profile while providing high-probability win rates.

Life Insurance Parallels

Insurance companies sell policies based on risk factors, then price these policies to their advantage. Insurance companies are betting on probabilities and sell overpriced policies above their expected losses. The insurer agrees to pay out a specific amount of money for a specific loss (i.e. death). In return, the insurance company is paid monthly premiums based on this risk-based revenue model. Insurance companies sell policies with a premium cost level that maximizes a statistical edge to the insurance company’s benefit. The goal is to collect premiums over the course of the policy and never payout on the policies they sell. So, the probability of paying out on the policy is very low while the premiums received, over the policy lifespan will exceed your total benefit. In terms of life insurance, it’s the probability that you won’t die before your predicted lifespan so the insurance won’t have to pay. In order to spread the potential payout risk, the insurance company will sell as many policies as possible to collect as much premium income as possible.

Options trading is much like insurance. I receive premium payments (policy payments) in exchange for selling options (insurance). I sell these options with a statistical edge (underwriting) and a high-probability of winning the trade (insurance won’t have to pay). Occasionally, options move against you (death occurred) and you’re assigned stock (insurance is paid out) however in order to spread the risk of being assigned shares, options (insurance) are sold across a diversity of tickers that include both stocks and ETFs with varying expiration dates and optimal sector exposure. Additionally, risk is mitigated by appropriate capital allocation, position-sizing, and holding cash reserves in the portfolio.

Results

Sticking to a set of fundamentals, this approach can provide long-term, high-probability win rates to generate consistent income while circumventing drastic market moves. Over the previous 11 months through both bull and bear markets, the win rate percentage was 84% (231/262). Over the previous 11 months, the options-based portfolio outperformed the S&P 500 over the same period by producing a 0.9% return against 0.4% for the S&P 500 (Figures 6-8).

Options
Figure 6 – Options based portfolio return (0.90%) in comparison to the S&P 500 return (0.43%)

Options
Figure 7 – Comprehensive options metrics over the previous 11 months

Options
Figure 8 – Dot plot summarizing ~260 trades over the previous 11 month period

Conclusion

Markets are efficient, and over the long-term the vast majority of actively managed funds are unsuccessful at beating their benchmarks. A staggering 92% of actively managed funds do not outperform their benchmark. Furthermore, when looking at The Russell 3000 Index over a 26-year timeframe (1983 to 2006) which comprises the largest 3000 U.S. companies, 39% of stocks were unprofitable investments, 64% of stocks underperformed the Russell 3000 and 25% of stocks were responsible for all the market’s gains. Taken together, only 36% of stocks outperformed the Russell 3000 index. Everything that can possibly be known about a stock is known, and there’s no edge in stock picking, hence the efficient market hypothesis. The only way to profit from this even distribution and market behavior is via options trading. Options trading allow one to profit without predicting which way the stock will move. Options allow your portfolio to generate smooth and consistent income month after month without predicting which way the stock market will move. Options are betting on where stocks won’t go, not where they will go and provide a statistical advantage.

An options-based portfolio has allowed me to do something 92% of actively managed funds haven’t been able to accomplish and that outperforms the broader index consistently despite the volatility and the month of August negatively impacting my portfolio in a disproportional manner. Selling options with a favorable risk profile and a high probability of success is the key. Options fundamentals provide long-term durable high-probability win rates to generate consistent income while mitigating drastic market moves. I’ve demonstrated an 84% options win rate over the previous 11 months through both bull and bear markets while outperforming the S&P 500 over the same period by a wide margin producing a 0.9% return against a 0.3% for the S&P 500 with a lower risk profile. Taken together, options trading is a long game that requires discipline, patience, time, maximizing the number of trade occurrences and continuing to trade through all market conditions with the probability of success in your favor.

Noah Kiedrowski
INO.com Contributor

Disclosure: The author holds shares in AAL, BAC, C, CVS, GPS, GE, HLF, KSS, SLB, TRIP, URBN, USO, WBA, and X. However, he may engage in options trading in any of the underlying securities. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of www.stockoptionsdad.com where options are a bet on where stocks won’t go, not where they will. Where high probability options trading for consistent income and risk mitigation thrives in both bull and bear markets. For more engaging, short duration options based content, visit stockoptionsdad’s YouTube channel.