By: Steve Smith
It’s been a strong week for the stock market. The S&P 500’s up more than 4% and the NASDAQ’s up a whopping 6%.
From a macro perspective, we still have the bullish triumvirate of favorable monetary and fiscal stimulus, a slow-but-steady roll out of the vaccine, and a solid earnings season. On the last front, we need to remind ourselves that the stock market or Wall Street, doesn’t reflect what’s happening on Main Street; not a judgment, just a fact. These three items will keep the three major indices such as the SPDR 500 Trust (SPY), Nasdaq 100 (QQQ), and Russell 2000 (IWM) moving up and to the right as they all closed at all-time highs today.
I’m focusing on the IWM, which consists of small caps and much more cyclical companies. After lagging badly, it has made a mad dash of closing the performance gap. Over the past three months, the IWM’s up 45% while SPY has staggered to just an 8% gain. The run-up in the IWM’s based on reopening stocks in travel and leisure and also commodity-based sectors such as energy, metals and agriculture. There is a growing belief that there will be an echo effect of the disruption to the supply chain caused by Covid. Basically, demand will ramp up faster than supply will come back online. I’ve certainly seen gas prices jump in recent weeks and for some reason, toilet paper is still in short supply.
Here are some positions that we currently hold in the Options360 Service:
The one that’s most directly impacted by the above narrative of growing inflation pressures is in the iShares 20+ Year Treasury Bond ETF (TLT). I established a bullish diagonal spread some four weeks ago when yields were 1.15%. Over the next two week’s yields moved back below 1.0%, meaning TT went up, and we were able to reduce the cost basis. But, over the past week, yield has jumped back to 1.15%. While the position’s still slightly in the green, I do need to reassess my thesis.
The Options360 Service also has a couple of more speculative plays in INAQ and SOLO which had been lying dormant but finally got a pop this week. I had structured these positions as ratio spreads allowed me to pare both by simply closing a portion of the positions to secure a profit while retaining upside exposure.
Have a great weekend and let’s see what next week brings!