By: Steve Smith
Stock indices are taking it on the chin again today with the SPDR S&P 500 (SPY) and Powershares Nasdaq 100 (QQQ) — both down 2%-plus, which should cement September as the worst monthly performance since you guessed it… last September. Those that play the seasonality trade can take a small victory lap.
But let’s be clear, the SPY’s now down 4.5% for both the month and off all-time highs. However, it’s still up 14% for the year. Likewise, the QQQ is off 6% while still up 16% for the year-to-date. So, while this recent decline’s significant, it’s hardly catastrophic. In fact, it’s probably the most forecast and welcome decline we’ve had over the past 18 months. And, we still remain well above the consensus that we’re “due” for a 10% correction.
It quickly seemed like BTD was back in play as the SPY and QQQ filled last Monday’s gaps and pushed through them, holding back above the 50-day moving average. This squeezed the bears with “oh no, here we go again” and emboldened the bulls to once again buy the dip. However, yesterday and today’s sell-offs have seemingly proved those gap fills were a bull trap.
While this market has shown that it’s foolish to call a top or get too aggressively bearish, I stand by my last Friday statement: “Presently, the upward momentum is broken. My best guess is that we still need to see both a retest of Monday’s low, and a fall back to the $420-$425 level, which would qualify as a 10% correction before we can resume a healthy and sustainable new leg higher for this bull market.”
The QQQs have now filled the gap. Let’s update the SPY chart and see if we hit that $425 target, which would represent the elusive 10% correction we’re waiting on.
All this talk is fine and dandy, but what have I actually been doing?
Well, as I shared in yesterday’s article, you know I added a bullish position in Advanced Micro Devices (AMD). Not the best timing with the stock down some 4% today. But, given the conservative structure of position which can now be revealed as a diagonal call spread long the (10/29) 106 calls and short the (10/08) 109 calls for a net debit of $4.00 our risk is well-defined. That doesn’t mean I was free from cogitating or needing to make a decision on handling today’s decline. As in an Alert to Options360 members this morning :
AMD really needs to hold this $103 level. I’d hate to bail just one day after establishing the position but that might be preferable to start making defensive adjustments.
I’ll play with some prices and keep an eye on it for the next hour or so.
But I wanted to give you guys a heads up.
Please hold the line so I don’t have to make a bad decision.
I quickly opted to stick with it but made an adjustment by rolling down the short 109 call to the 107 strike for a $0.50 credit, reducing the cost basis and giving us some time to see if we get a reversal. If it can’t get back above $103.50 within the next day or two, discipline will dictate that I close the position. In the infamous words of all great market prognosticators, “We shall see” if I made the right decision.
Some other risk reduction moves I made yesterday ranged from taking an early roll on our bullish diagonal in the Russell 200 Small-Cap (IWM) to leveraging relative strength and relative outperformance of the IWM versus the SPY and QQQ over the past few days.
Today, I closed out our bullish position in McDonald’s (MCD). The position still had two weeks until expiration with the potential for more income collection through another roll. However, with the spread being fully in the money and the market on shaky ground, I opted to close it for a 55% profit over the two-week holding period.
On the whole, this recent market decline has been kind to Options360. After all, we do thrive on market volatility, and our year-to-date performance now stands up 39% or more than double the SPY or QQQ. If we continue to get a good two-sided market with elevated volatility, rather than the paint drying we witnessed for the prior few months, I expect to close out 2021with more and larger profits.