Usually we make this the topic of a longer article at year-end, but frankly we are not holding positions for anywhere near a year, so this is just a mental exercise – not having a lot to do with our style of trading.
Recently, the CBOE’s Volatility Index ($VXST) closed above all three of the other CBOE Volatility Indices. At the time, it struck me as being a rather rare occurrence, and it seemed there might be some considerations as to forthcoming market movement. Consequently, a rather extensive study was performed, and indeed a trading system did emerge, as this article will reveal.
Breadth is the difference between advancing issues and declining issues, usually measured on a daily basis. Since the major averages only reflect what has happened to a few of the more important stocks (500 stocks in the Standard & Poors 500 Index – $SPX – for example, or 30 stocks in the Dow Jones Industrial Average), technicians have long used breadth as a measure of the health of the overall stock market.
There has been a fair amount of talk lately about how large capitalization stocks are the main reason that this market is still near all-time highs, in terms of the larger indices. There is some truth to this statement, but we will look at a historical perspective as well. There have been some rather preposterous statistics in this regard cited on TV, and I have no way of knowing if they’re true or not.
There is a brief window over the next couple of weeks where the market could be vulnerable, before bullish end-of-the-year seasonal patterns come into play. Our short-term market opinion is bearish (page 5), which fits within this scenario.
Meanwhile, the feature article addresses several of the seasonally bullish patterns, the most prominent of which we call the Post-Thanksgiving Seasonal trade. A recommendation is made for that system, on page 3.
Note that there are three weeks between newsletters, since there are five Thursdays in October. The next issue will be published on Thursday, November 12th, and of course there will be Hotline updates for the intervening weeks.
Everyone knows that stocks can gap by huge amounts on earnings reports. Who in their right mind would want to sell such straddles? We touched on this subject in the last issue, but have since had time to complete a more rigorous study. It turns out that, at times, these straddles can be sold.
We have been having a good amount of success with our event-driven straddles this year – especially with the pre-earnings straddle buys. We have refined that technique through several modifications since we first began by buying the Qualcomm (QCOM) straddle back in late January. I feel that we have a very workable strategy now, but there is one “hole” in it, which we will address in this article.
There are several seasonal trades that we use in the fall of the year – primarily the “October seasonal,” the “Post-Thanksgiving Trade.” and the “Heating Oil – Unleaded Gas Seasonal.” There are some others, too, that we don’t usually trade, such as the “January Effect” (which actually occurs in December), the “Santa Claus Rally,” and other trades surrounding Thanksgiving. As noted, we don’t usually trade the latter three specifically, but we have incorporated them into first set of systems that we do trade.
One of the great things about trading is also one of the worst things – the market can spring things on you that you never saw coming. Even if you were bearish, you certainly didn’t expect this kind of reaction (or if you did, I submit you’ve been bearish for a long time). In volatility trading, surprises can occur as well – and they have done so this time, as well.
