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Taking Profits On Our SPY Put Spread

A 40% net short in a single asset class is a rare event for me. So I vowed to cut it back on the next down day for risk control purposes only. The S&P 500 SPDR’s May 2016 $212-$217 in-the-money vertical bear put spread had the most profit to take, given that it was the furthest out-of-the-money with the shortest expiration date. If I blow up my performance betting the ranch on a single asset class, I am too old to get my job back at Morgan Stanley. Besides, they probably wouldn’t have me anyway. I never believed yesterday’s frantic 220-point rally in the Dow for two seconds. No volume, no news, and no cross-asset-class confirmation meant it was not to be believed. It was just another opportunity for the high-frequency traders to pick the pockets of hedge funds by squeezing them out of their shorts, which they have been doing on a weekly basis all year. That conviction allowed me to hang on to my aggressive 40% net short position. Better yet, we are poised to make as much as another 10% profit by the end of next week with out remaining positions. To remind you of why we are short the S&P 500 in a major way, let me refresh your memories: It’s all about the strong dollar. A robust buck diminishes the foreign earnings of the big American multinationals, major components of the S&P 500. I think it is much more likely that stocks grind down in coming weeks to first retest the unchanged on 2016 level at $2,043, and then the 200-day moving average at $2,012. Share prices are anything but inspirational here. Price/earnings multiples are at all time highs at 19X. The calendar is hugely negative. Soggy and heavily financially engineered Q1 earnings reports came and went. Huge hedge fund shorts have been covered with large losses, and no one is in a rush to jump back into the short side. Oh, and the bumping up against granite-like two-year resistance at $210 that will take months to break through in the best case. Did I mention that US equity mutual funds have been net sellers of stock since 2014? This position is also a hedge against what I call “The Dreaded Flat Line of Death” scenario. This is where the market doesn’t move at all over a prolonged period of time and no one makes any money at all — except us. To see how to enter this trade in your online platform, please look at the order ticket below, from OptionsHouse. The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out. Here are the specific trades you need to execute this position: Sell 22 May 2016 $217 puts at $9.27 Buy to cover short 22 May 2016 $212 puts at $4.44 Net Cost: $4.83 Profit: $4.83 – $4.40 = $0.43 (22 X 100 X $0.43) = $946 or 8.90% profit in 23 trading days. The Downside Protection That Worked Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Outperforming Buy And Hold Does Not Prove Skill

It is common in finance to compare returns of market timing strategies to buy and hold returns. Although this is useful in determining any excess returns achieved by the timing strategy, it is far from a proof of skill. This is because, depending on the path prices follow, random traders may achieve returns much higher than buy and hold. I will approach this problem by providing two examples that are based on simulating random traders who use a fair coin to purchase shares in SPY (NYSEARCA: SPY ) at the close of a trading day and when heads show up. The shares are sold at the close of a day when tails show up and this is repeated for the whole price history under consideration. Then, the simulation is repeated 20,000 times to get a distribution of the net return of all random traders. Starting capital is $100K and commission is $0.01 per share. Equity is fully invested. Results for 2013 Click to enlarge The SPY buy and hold total return for 2013 was about 26.45%. It is shown in the results above that the return for significance at the 5% level is about 22%, which means that this return is better than the return of 95% of random traders. In this case, a return of a market timing strategy below the buy and hold but above 22% can be an indication of skill since it is significant at the 5% level or better. Also note that more than 97% of random long traders made a profit in 2013 due to the strong uptrend. Results for 2015 Click to enlarge Although the SPY buy and hold total return for 2015 was just 1.3%, the minimum significant return for comparison to random traders was about 14%! A market timing strategy would have to generate a return of more than 14% to prove that it was better than 95% of random traders, or significant at the 5% level. About half of the random long traders made a net profit in 2015, still better than casino odds of course. Therefore, even a return of 10% would not be sufficient for proving skill in this case, as it would not be significant at the 5% level. Therefore, comparing to buy and hold for proving skill may not make sense depending on the path prices follow. During strong uptrends, the minimum significant return to support skill may be closer to buy and hold but when markets consolidate it may be much higher because there are always those lucky random traders that skew the distribution of returns. As a corollary, comparing average returns to buy and hold returns may make no sense at all since the difficulty of generating excess alpha varies from year to year. Original article Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Analysis program: Price Action Lab

A Star-Spangled April For Moats

Performance Overview Moat-rated companies continued their strong start to 2016 in April. U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) topped the S&P 500® Index (5.20% vs. 0.39%) in April and widened the gap in relative performance year-to-date (12.05% vs. 1.74%). On the international front, Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) lagged the MSCI All Country World Index ex USA in April (1.43% vs. 2.63%), but maintained relative outperformance year-to-date (4.09% vs. 2.25%). U.S. Domestic Moats: Healthcare Rotation Pays Off St. Jude Medical, Inc. (NYSE: STJ ) was the big winner among domestic moat-rated companies in April. Late in the month Abbott Laboratories (NYSE: ABT ) announced its intent to buy STJ US in a deal that is expected to close in the coming fourth quarter. As part of its quarterly review, the MWMFTR Index rotated into several healthcare companies, including STJ. According to Morningstar, the healthcare sector offered a number of attractive valuation opportunities in March, some of which contributed to MWMFTR’s strong performance in April. Drug manufacturer Allergan plc (NYSE: AGN ), however, provided no such boost to results. A U.S. Department of Treasury tax ruling squashed any hope for its planned merger with Pfizer (NYSE: PFE ), pushing AGN lower for the month. International Moats: Oh, Canada MGEUMFUN’s exposure to financials companies, particularly Canadian banks, contributed to positive performance in April. Only three of the 24 financials companies in the Index posted negative returns last month. Additionally, Russian operator Mobile Telesystems (NYSE: MBT ) has been on a roll since announcing solid fourth quarter results in March. Strains on performance came largely from some of the Index’s consumer discretionary constituents, such as Macau gaming firm Sands China ( OTCPK:SCHYY ) and Chinese car manufacturer Dongfeng Motor Group Co. ( OTCPK:DNFGY ). Monthly Index Total Returns Top/Bottom Index Performers Index Reconstitution Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.