Protect Your Portfolio Gains In A Euphoric Market

Posted on by The INO.com Team

Impeachment proceedings, U.S.-China trade war, Federal Reserve actions, etc., dominate the headlines and move markets in lock-step. The broader indices are at all-time highs and continue to set new high after new high despite the aforementioned variables. The markets have been on a steady rise for months without much resistance, and overall volatility remains low, indicating that market participants have become overly confident and complacent. The S&P 500 has had a banner year in 2019, posting a year-to-date return of over 25% through mid-December. A “blow-off” rally may be underway at this market juncture, and locking-in portfolio gains while mitigating risk is prudent. An options-based portfolio can offer a superior method to constantly locking-in gains while mitigating risk in these frothy market conditions. Over the previous 15 months through the bear market of Q4 2018 and the bull market of 2019, an options-based portfolio has returned 11.6% compared to the S&P 500 return of 8.7%. These returns have been accomplished with an 87% win rate while having the flexibility to hold ~50% of my portfolio in cash. An options portfolio enables optimal risk mitigation and realization of profits on a continual basis, especially important during market euphoria conditions.

Protecting Market Gains

An options-based approach is much like an insurance company where you sell insurance policies and collect premium income at a level that maximizes a statistical edge to your benefit. This strategy mitigates risk and circumvents drastic market moves. Selling options and collecting premium income in a high-probability manner generates consistent income for steady portfolio appreciation in both bear and bull market conditions. This is all done without predicting which way the market will move. Primarily sticking with dividend-paying large-cap stocks across a diversity of tickers that are liquid in the options market is a great way to generate superior returns with less volatility over the long-term.

Over the past ~15 months, 349 trades have been made with a win rate of 87% and a premium capture of 58% across 70 different tickers. When stacked up against the S&P 500, the options strategy generated a return of 11.6% compared to the S&P 500 index which returned 8.7% over the same period. Options are a bet on where stocks won’t go, not where they will go, where high probability options trading thrives in both bear and bull markets (Figures 1 and 2). Continue reading "Protect Your Portfolio Gains In A Euphoric Market" →

S&P 500 Posts Fourth Week Of Gains

Posted on by The INO.com Team

Hello traders everywhere. I feel like a broken record, but once again, the S&P 500 and stock market is hitting record highs as we head into Friday afternoon trading and the end of the trading week.

Entering Friday's afternoon session, the S&P 500 was up +1.7% for the week and was headed for its fourth consecutive weekly gain. The DOW and NASDAQ were up +1.2% and +2.1%, respectively, for the week marking their second straight week of gains.

The S&P 500 is up nearly 28% year to date, with less than 10 trading days left in 2019. That would be the index’s best one-year performance since 2013 when it rallied 29.6%. Not be outdone the NASDAQ index has jumped 34% in 2019.

Stocks tend to carry such strong momentum into the following year. Data compiled by Nordea Research shows the S&P 500 posted positive returns the year after rallying more than 25% in 12 of 18 occasions. Continue reading "S&P 500 Posts Fourth Week Of Gains" →

Wooing Inflation

Posted on by Gary Tanashian

The Continuum (the systematic downtrend in long-term Treasury yields) has for decades given the Fed the green light on inflation. Sometimes it runs hot (as per the red arrows) and sometimes it runs cold. One year ago people were confused about why a declining stock market was not influencing Fed chief Powell to reverse his relatively hawkish tone.

tyx-Inflation

The orange arrow shows exactly why, per this post that will be one year old tomorrow (Dec. 19)…

FOMC at Center Stage (NFTRH 530 Excerpt)

Inflation is what the Fed does, after all. But it needs periodic deflationary episodes in order to keep the racket going. I will stick with my original view that the Fed is not adverse to a market correction or even a bear market. It is exactly what is needed to reload the next inflation gun.

The “BOND BEAR MARKET!!!” stuff ran very hot on this cycle as the 30 year yield broke the Continuum’s limiter (monthly EMA 100) before failing over the last few weeks (to the surprise of many, but not us ;-)). As I have noted previously, in my opinion the Fed does not want a bond bear (breakout in yields) or its running mate, a breakout in inflation expectations because the Fed is an inflation machine. But it has inflated against this pleasant continuum of declining yields over the decades that has encompassed the entire training of most of us as market participants.

Inflation

I am not saying that a red dashed line is the be all end all of market analysis. But it is a marker that we have used in NFTRH since 2008 in order to correctly interpret the macro situation. My interpretation today is that the Fed has countered the cost-push inflationary pressures that by definition are injected through fiscally (political) stimulative policy by withdrawing liquidity until something breaks. Ironically, that has involved raising the Fed Funds interest rate and withdrawing QE, which theoretically would raise long-term yields. But when something breaks, the risk ‘off’ herds buy the bond driving yields down.

Fast-forward to today. The herds bought the bond alright; they bought it for most of 2019 amid ‘trade war!!’ and ‘inverted yield curve!!’ headlines and associated economic fears. And so the Continuum dropped again, along with inflation concerns and logically, the Fed’s hawkishness after the Q4 2018 orange alert. Continue reading "Wooing Inflation" →

Thankful For Another Great Year On Wall Street

Posted on by Matt Thalman

This past Thanksgiving, millions of Americans sat at the dinner table and proclaimed what they were thankful for. For some, it was loved ones, new family members, a promotion at work or a new job altogether, but at the very least, the food that was about to be eaten was mentioned. The success of the stock market in 2019 was undoubtedly one of mine, but I may be in the minority when it comes to people who said such out loud.

However, with the major indexes again trading at new all-time highs, something we have now had occur more than 20 times in 2019, 18 times in 2018, 62 times in 2017 and another 126 times from the start of 2013 until the end of 2016, its hard not to think about how much further this bull market can run.

Adding new money to the market seems very risky today based on how far the market has come the past few years and considering we have seen so many new all-time highs over the past few years.

However, new all-time highs is a very normal thing for the market. Since 1928, the U.S. stock market has seen new all-time highs on 5% of the trading days. Think about that! That’s on average, one in every 20 trading days, the U.S. stock market is hitting an all-time high. From that perspective, a new all-time high sort of seems like not that big of a deal.

Another crazy thought is that since World War II, the U.S. stock market has spent nearly 40% of its time within 5% of all-time highs. Ok, so almost half the time stocks are trading within reach of an all-time high. Furthermore, 54% of the time stocks are trading within 10% of all-time highs.

However, that means 46% of the time stocks were more than double digits below their highs. Continue reading "Thankful For Another Great Year On Wall Street" →

Current Equities Rally Similarities To 1999

Posted on by Chris Vermeulen

Euphoria is a type of market rally where valuations, real market expectations, and global market concerns are pushed away from view while a trader based rush to rally takes place. One of the clearest examples is the 1995 to 2000 DOT COM US stock market rally. As the Internet burst into homes and businesses across the world, the US-led the way with dozens of new Internet-based IPOs touting glorious expectations, potential earnings and more. Everyone had the idea this new medium would dramatically change the economy for the better and breakthrough traditional economic boundaries.

The rally that took place in 1995 through 2000 was incredible. The S&P 500 rallied from 463 to 1535 – +235.57%. What we find interesting is the “price wave formation” that took place within that rally. There were a number of key price rotations that took place as the market continued to rally, we’ve labeled them A, B, and C. The first rotation, A, took place in July~Dec 1997. The second, B, took place from May 1998 to November 1998. The last, C, took place between January 1999 and November 1999. Technically, these rotations are significant because they represent “true price exploration” related to price advancement. The price must always attempt to identify true support/resistance levels while trending.

When we compare the rally from 1995 to 2000 with the current rally in the US stock market, we can see a defined level of euphoric price advance after the 2016 US elections. We must also pay attention to the previous price advance from the 2009 price lows as the global markets were struggling to recover from the Credit Crisis. Our research team identified the A, B, C rotations in the current price and associated them to the similar rotations in the 1995-2000 price rally as “key components of the current rally and a potential warning sign of a pending top formation”.

Our researchers believe the QE processes of the global central banks have set up a similar type of euphoric price rally in the current global markets even though current economic metrics are warning of weakening economic activity and weakening global market output. The US Fed and global central banks seem to want to keep pumping money/credit into the global markets to keep the rally going – most likely because they are fearful of what a crash/correction may do to the future growth opportunities around the planet. Continue reading "Current Equities Rally Similarities To 1999" →