What a great way to start the year.

The S&P 500 gained 2.6% during the first week of 2018. That’s almost half the 7% targeted gain many analysts have for the entire year.

“If we can do this every week,” one television talking head cheered on a popular financial show over the weekend, “the market will gain 130% this year.”

“I’ll be happy with half of that,” said another talking head as the rest of the panel nodded and laughed.

The talking heads sure seem comfortable being bullish.

And why shouldn’t they be? Outside of a slight dip during the final hour of the final trading day of 2017, the S&P 500 has traded above its 9-day exponential moving average (EMA) for eight straight weeks. That is a remarkable display of bullish price momentum.

But the rubber band is getting quite stretched.

The S&P 500 rarely strays more than 30 points away from its 9-day EMA before snapping back towards the line. It rarely trades more than 100 points above or below the 50-day moving average (MA), either.

On Friday, the S&P 500 closed 39 points above its 9-day EMA and 125 points above its 50-day MA.

So, the market is vulnerable to some sort of a snap-back move – or at least a pause in the rally that would give the moving averages time to rally up towards the current price of the index. Either way… any further gains in the stock market from here – while the rubber band is already quite extended – are likely to be given back, quickly.

This isn’t a popular opinion, of course. I don’t think I heard any words of caution out of any of the talking heads over the weekend. “Hold your nose and buy,” was the most cautious sentence uttered.

But the market is already quite overbought. The Volatility Index (VIX) is back in single digits – which is a sign of investor complacency. The American Association of Individual Investors (AAII) survey – a contrary indicator – just reported that 60% of investors surveyed are bullish on the stock market versus only 16% bearish. And financial television talking heads are joking about the market rallying 130% this year…

Call me a party pooper if you wish. But I don’t mind holding onto my cash until the rubber band snaps back a bit from here.

Best regards and good trading,

Jeff Clark

Reader Mailbag

To lead today’s mailbag, a question about the Delta Report’s 2017 track record…

What was Jeff’s record for earnings trades for the year of 2017? Only the straight buying a put or buying a call. Someone with limited funds would not have traded the “sell puts” earnings trades.

How many wins, how many losses? The percent gains for the wins? The percent loss for the losers? I repeat, for only the straight buying puts or calls. Thank you.

– David B.

Jeff: Thanks for the question, David.

Option premiums tend to be inflated right in front of a stock’s earnings announcement. So, in most cases, traders will have a higher probability to profit by selling expensive options. This strategy allows you to profit when you’re right on the stock’s direction after the announcement. And you can still profit even if you’re wrong because you captured such a large premium for selling the option.

That said, my earnings system has, on occasion, recommended buying call and put options instead.

We started trading with my earnings system in mid-May of 2017. I recommended seven trades that involved simply buying call or put options. All seven of those trades were profitable. Here’s the breakdown…

  • TOL puts made 80% in four hours.
  • GES calls made 100% in one day.
  • DAL puts made 28% in one day.
  • XOM calls made 2% in five days.
  • ORCL puts made 80% in one day.
  • HOG calls made 21% in one day.
  • ABT puts made 8% in 12 days.

This is a small sample size. But, like I said, the preferred strategy for most of my earnings trades is going to be to sell uncovered options rather than buying them.

But, you asked for just the purchases. So, there you have it… seven trades, seven profits.

And now, a couple more notes from happy Delta Report subscribers…

Just wanted to say how much I enjoy your service. I am so glad I purchased a lifetime membership. I have to say that if I did take large losses, it wasn’t your fault, but my own, for not adhering to position sizing or cutting loses when I should.

Your knowledge and forecasting is amazing. Thanks again for a great service!

– Randy W.

 

This note is to thank you for your trading service. I had a winning percentage of 70% for 2017. My first trade with you was on 6/14/17, the HYG trade.

I was not able to enter your trades always, usually to a lag time of me finally reading your post. I’m still working full-time and sometimes the job gets in the way of my trading.

The winning percentage is phenomenal in my book. I am very pleased with that. But more important to me is your approach and the subsequent detailed explanation of that approach you use.

You have changed my life, sir. No longer am I fearing my wife and I will not be able to enjoy our retirement. Your tutoring has given me the knowledge to begin looking at all the trades I do in a completely different mindset. It has been life-changing.

– David W.

 
As always, feel free to send in your trading stories, questions, and suggestions right here.