This week could see the March low of 1249 violated. If
that happens then the 200 day will have been broken and
the bulls will have a tough time defending their turf. I
bought SPY puts on Thursday but I have not yet sold
them. I plan on closing some puts this week and watching
carefully for any further downside. The trend remains
down until the market can create higher highs and higher
lows. This has not been the case since May. For myself,
it is time to not only be cautious but to consider
closing profitable positions and waiting for the market
to prove it will not fall further.
FINANCIAL STOCKS
The bear market in financial stocks which is now 6
months old, continued last week unabated. Many analysts
feel that financials in the stock market (not Canadian)
are very undervalued and will recover. What I do not
understand is why would anyone not wait for these bank
stocks to recover before committing capital. For those investors who believe US Banks are undervalued, why not sell call options instead? That way
if the stock does recover, they can purchase the shares
and turn the naked call option into a covered call. On
the other hand if the stock languishes or stays
sideways, at least the investor is gaining income while
waiting, which in the end, will reduce their cost basis in the
stock.
Many investors feel that naked calls are very risky. After doing naked calls for years I have found them exactly the same as naked puts. In a down market, unless you want the stock
assigned, naked puts are not the option to sell. Spreads
can be a decent choice but I prefer call spreads over
bear spreads. My personal choice however remains with
selling naked calls and staying with SPY puts for
hedging.
I believe the clue to a sustained rally in the
markets will be when financials end their bear market
and begin recovering. How long can that take? I have not
a clue, but if some of the
articles I have read recently on Barron's online are
any indication, it could be a while.
Below is the chart of the period from 1972 until 1979
when I first started investing. All in all, the market
went nowhere. Anyone who invested in the index (which
wasn't actually available since ETFs weren't around at
that time) saw an entire gain of 9.73%. What anemic
growth, but the 1970's was a very scary time to be
invested. The market collapse in 1973 to 1975 wiped out
a lot of investors. In 1972 I had just started with
selling options and for most of the decade I sold naked
calls and to a lesser extent naked puts on a handful of
stocks. The majority of stocks did not have options
available, so I had just a small number of stocks
available.
SUMMARY
I put up the chart of the 1970's to show that we could
easily enter into a period of limited growth which could
see the markets tend sideways for an extended
period. It is definitely not out of the realm of
possibilities. Meanwhile though, should Greece default
on their debt, definitely the markets will enter a
period of instability and I would think quite the
pullback if not a new bear market. For me I plan to keep
a lot of my capital out of the market, hold some SPY
puts and sell far out of the money naked puts and naked
calls, but only on stocks I would hold through a
financial crisis, which could be worse than the credit
crisis of 2008. Right now that does not include any US
Financials.
