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Prediction: Dec 31,2012 S&P 500 close at 1418, up 12.78%

 
Wednesday, February 8th, 2012 | Vance Harwood
 

One forecaster has correctly predicted the S&P 500 year-end close within an average of 2% for the last 4 years:

Year End Estimated  Actual % Difference
31-Dec-08 879.82 903.25  +2.66%
31-Dec-09 1111.92 1115.1  +0.286%
30-Dec-10 1211.92 1257.88  +3.79%
30-Dec-11 1248.29 1257.60  +0.75%
31-Dec-12 1418.30    ??

 

This forecast is not from a  human, or a computer program—it’s the year-end closing value of the S&P from 6 years prior.   The chart below shows SPY (effectively 1/10 of the S&P) from 2003 to 2006 with SPY from 2009 to the present superposed on the same day of the month.

At the bottom I’ve shown the VIX index for these two different time spans.

I don’t believe patterns from the past are reliable in predicting the future.   It’s not surprising that markets recovering from crashes will show a similar trajectory, but since first seeing this pattern in November, 2009 I’ve been surprised at the close correlation.   This year showed the biggest divergence, with 2011 SPY going as much as 19% above the 2005 SPY and 10% below before moving back into synchronization.

One thing is clear—volatility since the 2008/2009 crash continues to be elevated.   I predict that the market in 2012 will not be for the faint of heart.

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A brief condor

 
Tuesday, December 21st, 2010 | Vance Harwood
 

I don’t think much is going to happen with the market this week.  Trading on that hunch I put a condor position in place Monday with SPY weekly options expiring this Thursday, the 23rd.  The position is composed of short calls (S126 at .11) and short puts (S124 at .38) to create the upside of the position, with long calls (S127 at .04) and long puts(S123 at .18) to limit the risk.   SPY was at around $124.6 when I created the position.

I used Fidelity’s Active Trader Pro software to create the position, it allows the condor to be created with a single trade.  The net credit I received was  $0.27, the worst case loss of $0.73 would be if SPY moves above $127 or below $123.   The bid/ask spread was around $.04.  I  tried to get a fill between the two prices, but without success, so I gave in and offered the asked price.

Posted in all, Options | No Comments »

What about 2011—will it be a replay of 2005?

 
Wednesday, December 15th, 2010 | Vance Harwood
 

Since November 2009 I have been noting that the S&P500 (represented here by SPY) has been closely retracing the path that it followed in 2003 and 2004.  Now that 2010 is drawing to a close, I took a look back at 2005 to get one vision (hallucination?) of what lies ahead for 2011.  My updated graph showing SPY, normalized SPY volume and VIX over those 3 years is shown below:

SPY 2003 through 2005 vs. SPY 2009 through 2010, click to enlarge

 

 

 

 

 

 

 

 

 

 

A couple things jumped out to me, looking at the 2005 results:

  1. 2005 was a sideways year, with very little movement. The low for the year was around 114, the high 128—boring.
  2. Volume really picked up later in the year.  Did the retail investors, burned by the tech crash finally come back to the market?
  3. Volatility in 2005, as measured by the VIX was quite low.  People are remarking about our recent lows of 17, but 2005 averaged 12.8.

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Although the 2009—2010 price path has crossed over the 2003-2004 path at least every couple of months, the 2009-2010 volatility has been consistently much higher than the numbers 6 years ago.  Is this due to lingering fear from the truly scary days of 2009, or has something structurally changed in the market?  There is no question that the inherent speed of the market has multiplied (Nanex reports that the Flash Crash propagated from Chicago Futures to the New York exchanges  in 20 milliseconds).   For reference light takes about 4 milliseconds to cover that distance.  I’m pretty sure the market linkages were at least a factor of 10 slower in 2004.   Whether this directly leads to increased volatility is open for debate, but I don’t see how it could inherently reduce volatility.    I’m pretty confident that 2011′s volatility will on average stay higher than 2005′s results.

I don’t believe that price pattern coincidences are necessarily predictive.    I think there are macro-economic similarities between the two periods, but there are also a lot of differences (e.g., increasing correlation between asset classes, on-going intervention by the Fed, very low inflation, etc.).    My gut feel is that 2011 will be better than 2006, but my crystal ball is not particularly reliable…

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Posted in all, VIX | No Comments »

One of these correlations is going to fail

 
Wednesday, November 17th, 2010 | Vance Harwood
 

Since November 2009 I have been commenting on the eerie day to day correlation between the market (specifically SPY)  of 2003/2004 and 2009/2010.    These charts continue to track with November 16th’s closing value of SPY (118.16) differing only 0.28 points from SPY’s closing (117.88) on November 16th, 2004—six years ago.

 

SPY 2003/2004 vs SPY 2009/2010, click to enlarge

 

 

Recently I noticed another correction with the past—the market rally beginning in February 2010, versus the current rally that started in August.  Today’s closing is within 0.32 points of the April 27th close (118.48)—55 trading days into the twin rallies.

 

 

 

 

Twin rallies Feb and Aug 2010, click to enlarge

 

Soon one of these correlations is going to break.   In 2004 the market went into a sustained rally starting in November.  In May 2010 the February rally stumbled, with the aid of the Flash Crash into a significant correction.

My guess is that the market is going to be going down for a while…

 

 

 

Posted in all | 1 Comment »

The tale of two rallies

 
Monday, October 11th, 2010 | Vance Harwood
 

SPY’s 2010 price path for the 8th of October is about 3 points higher that the 2004 trend top line, but that is consistent with 2010′s considerably higher volatility. Recently there have been articles noting relatively low trading volumes, but compared to the normalized volume in 2004 (which at an absolute level was about 3.5x lower) volumes don’t look out of line.

SPY 2004 vs 2010, click to enlarge

The rally that we are currently in started around the 31st of August.    To me it has felt similar to the long rally we had starting in February 2010.   No wonder.  Both rallies started with SPY in the 105 to 106 range, and have tracked closely since then on a day by day basis–see below.

SPY rallies: Feb 2010 vs Aug 2010, click to enlarge.

If these rallies stay in sync then we would expect the next bear cycle to start right before Thanksgiving.

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Six years and a point apart

 
Tuesday, September 21st, 2010 | Vance Harwood
 

The surprising day-to-day correlation between SPY in 2004 and SPY in 2010 continues.  The 21-September closing values were 112.96 (2004), and 113.98 (2010)—not exactly a rousing endorsement of buy-and-hold strategies.

This year’s SPY has traded below the old SPY line since mid August, but it just crossed over, challenging the top 2004 trendline (see below).    It appears that the scary months of September and October were pretty boring six years ago, with SPY trading in a tight range.   SPY’s volatility in 2010 has been quite a bit higher, a trend I expect to continue.

While in general I don’t believe that the past reliably predicts the future, I think we are in similar economic times and the investor psychology  is comparable  (remember the tech bust?).  I expect this correlation to continue.

SPY 2004 vs SPY 2010, click to enlarge

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Dealing with the dividend when you have a short position

 
Wednesday, December 7th, 2011 | Vance Harwood
 

What if I’m short a security when it goes ex-dividend?

You are on the hook for the dividend if you are short the stock/ETF when it goes ex-dividend.  It will be subtracted from your brokerage account on the distribution date.  You borrowed the stock, you are responsible for paying the owner of the security the dividend.

More questions on dividends?  See Top 10 questions about dividends.

Posted in Advanced Topics, all, dividend, ex-dividend | 2 Comments »

Dividend capture by buying SPY and shorting IVV?

 
Friday, March 25th, 2011 | Vance Harwood
 

If your devious dividend capture plan involves you hedging against SPY’s price movements by selling IVV short until after SPY goes ex-dividend you can forget about it. The IVV (Barclays Global) price doesn’t drop by SPY’s dividend amount on SPY’s ex-dividend date. It continues to track the S&P 500 until it goes ex-dividend a few days later. Your master plan will net out with you down by at least your commission costs.

For  IVV and SPY ex-dividend and distribution dates and lots of others  see here.

Thanks to Jeff in the comments below for pointing out to me that IVV management doesn’t have to do anything in order for this to play out this way.

IVV vs SPY (June 2010 ex-dividends), click to enlarge

Posted in all, dividend, Dividend Capture, ex-dividend | 3 Comments »

Testing the bottom 2010 trendline

 
Thursday, August 26th, 2010 | Vance Harwood
 

The closing  value of SPY is within about a dollar of the 2010 bottom trendline in the chart below.  There is lots of talk about a double dip recession, but I’m betting on a bounce.

 

SPY 2003/2004 vs SPY 2009/2010, click to enlarge

 

 

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Are we at the bottom yet?

 
Wednesday, August 25th, 2010 | Vance Harwood
 

After several sell-off days with low volume, the buyers seem to be coming back.  I bought SPY at 105.22, sold 27-Aug 106 calls at 0.58. Breakeven is 104.64. Maximum profit is $1.36 per share.

Livevol shows the 27-Aug 106 IV’s at 28 and the 18-Sept monthly IV for the 106 calls at 24.  Right now, Livevol’s IV numbers are the only ones I believe for the CBOE Weeklys options.

Posted in all, Covered Calls, Options | No Comments »

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