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2004 vs 2010 —what about the yield curve?

 
Wednesday, June 30th, 2010 | Vance Harwood
 

I continue to monitor the correlation between the 2004 values of SPY v.s. the 2010 version.    The summer of 2004 was a sideways, slightly declining market and the summer of 2010 seems to be following suit.    I was curious how the US treasury interest rates between the two periods compared, so I looked up some data.   The yield curves in both time frames are similar—steep.  The differential between 2 year bonds and 5 year bonds in 2004 was 1.11 percent, compared to 1.25 percent now–so that is pretty close also.  In 2003 and 2009 this differential peaked around 1.6 and has been in decline since (see below).

http://www.tradersnarrative.com/wp-content/uploads/2010/04/, click to enlarge

http://www.tradersnarrative.com/wp-content/uploads/2010/04/, click to enlarge

The updated values of SPY and VIX are shown below:

SPY 2004 vs 2010, Click to enlarge

SPY 2004 vs 2010, Click to enlarge

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Where is the 2010 top trendline?

 
Wednesday, June 16th, 2010 | Vance Harwood
 

On the chart below you can see that using the slope of the 2004 SPY trendlines anchored on the February 2010 market bottom gave a 2010 bottom trendline that nicely predicted the bottom (or at least a pause) in the recent correction.

The big question now is the top trendline.    Of course there is nothing to say that 2004 will in anyway predict 2010, but there are macro level similarities (sideways period after a rapid run-up after a grueling  bear market, general business recovery) as well as micro level similarities (2004 and 2010 SPY prices closed less than $2 away from each other today).

On the dissimilarities ledger, volatility is running considerably higher in 2010, Eurozone troubles could plunge that area into even more severe economic difficulties–dragging the rest of the world down, and there is some evidence that ETFs are disrupting the historical tendency of some asset classes (e.g., commodities,  bonds) to behave differently than the equities market.

Given the scare of the recent correction (assuming it is over), I find it hard to believe that the market will quickly rally back into 121 territory for SPY.  On the other hand, the 2004 top trend line is only a few points away at 114–just a couple of good up days away.   I’m guessing the ceiling will be around 116 / 118 for SPY through this cycle.

SPY 2004 vs 2010, click to enlarge

SPY 2004 vs 2010, click to enlarge

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SPY dividend capture–June 2010

 
Wednesday, June 16th, 2010 | Vance Harwood
 

I bought SPY at 111.64, and sold-to-open SPY 108 June-30 expiration calls at 4.08 for a net investment (debit) of  107.58.     I used the quarterly SPY options because I could go considerably deeper in the money with the calls and still get a premium that is close to the likely SPY dividend for this quarter  (around $0.50).   Schwab does not appear to offer access to this series of  options, but Fidelity does.

If SPY stays above 111 through this Thursday I expect these options will be assigned–because the premium left on the calls will be less than the dividend the stock will payout.   Friday is the ex-dividend date for SPY.   If the calls are assigned I’ll collect $0.42 per share.     If the options are not assigned, I will collect the SPY dividend–lowering my breakeven point to around 107.08.

For more info on this dividend capture strategy see this post

Posted in Advanced Topics, all, Covered Calls, Dividend Capture, Options | No Comments »

Fear dying down?

 
Friday, June 11th, 2010 | Vance Harwood
 

Bought SPY 109 July calls (17-July expiration) at 2.90.

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Last leg of the correction? Time to break the 2010 trendline?

 
Wednesday, June 9th, 2010 | Vance Harwood
 

Although recent intra-day lows have crossed the 2010 trendline in the graph below I hallucinated in February we haven’t had a SPY closing yet that has crossed that line (104.87  for  9-June-2010).   My crystal ball has been notably hazy recently, but I’m still thinking this is a correction and not the beginning of a bear market.

I continue to be bearish on the prospects for Europe’s monetary union—I think they inadvertently created a gold standard of sorts (the Euro with Germany as the center of mass).     Economists generally frown on such things because the only response left in tough times if you can’t devalue the currency and/or renege on national debt  is to put draconian economic measures in place (e.g., benefit cuts, decreases in government spending)–at a time when many of the countries are already in severe recessions.     Unless Germany agrees to an inflationary strategy, or the European Common Market agrees to a much more centralized government (neither of which seem likely) I predict more drama for the Euro.

SPY 2010 vs 2004, click to enlarge

SPY 2010 vs 2004, click to enlarge

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Will things start looking up for BP?

 
Thursday, June 3rd, 2010 | Vance Harwood
 

I’m optimistic that this generation of containment device will work–once they manage to trim the pipe.  Bought BP July (17-July expiration) calls at 40 for 2.84.  BP is currently trading at 38.34.

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Recovering from a correction–six years ago

 
Tuesday, June 8th, 2010 | Vance Harwood
 

On June 1st 2004 SPY was well on its way recovering from a 5% correction that started in May.  The jury is still out on whether this year’s 12% correction (based on closing values) is over, or just the beginning of a bear market.   Six years ago we didn’t have the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) in financial turmoil, or a big oil leak in the gulf,  on the other hand, Iraq was looking pretty shaky back then.

If you are looking for bullish signs you can point to the big increase in normalized volume–the 25 trading day average on SPY is at 346 million shares per day.

SPY 2004 vs 2010, click to enlarg

SPY 2004 vs 2010, click to enlarge

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