Due to the 5-week cycle in the September expiration cycle I will establish a position next week (4 weeks out). At the same time I will also establish a similar position in SPY so that we can compare how the two react to the market on an individual basis.
Also, next week I will begin the SPY LEAPS strategy which I will discuss in great detail in the daily commentary section. I will utilize the paper trade tool in Thinkorswim to accurately report all of the details including greeks, etc. Stay tuned
The resiliency of the market this past week certainly surpised me. However, given all of the reasons I stated in yesterday’s post I think we should see some short-term weakness next week.
Let me repeat what I stated.
First, going back 20 years in the S&P, every bounce off a major low (if we indeed hit one recently) was brought back to reality. Each instance saw the major benchmark, S&P move lower to test the recent low. Many have compared the price action recently to that of the correction that began in late February. The market bounced for several days, but ultimately came right back down to the established. My guess is this type of action will play out again.
Okay, on to my second reason. Next week brings some fairly bearish seasonal conditions. According to the Stock Trader’s Almanac the “end of August has been murderous 6 out of the last 10 years” with the “average loss for the last 5 days: Dow -2.6%, S&P -2.3%, and the Nasdaq -2.1%”.
Couple the price action of the market recently (it just feels heavy to me) with the oh so convenient seasonal bearishness that lays ahead and I think we could see a test or at least a short-term decline in the near future.
Recent history does not necessarily mean that it will repeat itself again this time around, but given the aforementioned I have to go with historical precedence.
Overbought/Oversold for August 24, 2007
SPY - 74.2 (overbought)
IWM - 64.7 (neutral)
DIA - 71.4 (overbought)
QQQQ - 71.0 (overbought)
GLD - 66.0 (neutral)
OIH - 72.3 (overbought)
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Andrew Crowder, www.crowderinvestments.com