7 I decided to buy a very small put option position in kick-ass grandpa stock Honeywell $HON (Sept 60’s) early in Friday’s trading session. Counter-intuitive…maybe, but this is also 5-day maximum trade for me, and the position is incredibly small.
As has been told on these pages, I have been missing much more than I have been hitting lately. I needed to step back and get a grasp on exactly what the fuck it is I’m trying to accomplish here. As far as my positions go, my $DIA calls have been crushed to dust, I sold 1/2 of them the other day at 0.75…and am holding the rest. They are June 128’s, so my remaining contracts are lotto tickets at this point.
Fuck me.
The account is bleeding…I have stopped it, but we were, nevertheless, taking on damage at an alarming rate.
I sold out of that piece of shit $CREE at about break even on the trade….but it was all on me. I got so swept up in “hold until the bounce”, that I ignored what it was telling me until it was too late. STUPID.
$THLD continues to bounce between 6 and 7…I’m going to take some off here for a profit (hopefully) soon.
Let’s see, I also have $MO which is has to be considered in the upper echelon of dividend stocks. Feel free to add to this position on ANY and ALL pullbacks. These fuckers pay 5.45% too. That’s crazy yield for a stock that does nothing but go higher…a truly awful company…but crazy nonetheless.
Anyway, back to my short position in $HON. This was a trade based solely off of what my studies were telling me.
Instead of pulling the trigger on another impulsive trade, I forced myself to sit back and wait for something where I can feel some level of comfort, understanding and confidence. I was really happy to see the market try to book some gains earlier this week as I wanted to see how various industries would react versus the market as a whole.
What would outperform?
What weathered the (initial) storm the best?
Of primary interest to me was determining which industries were lagging behind the market as a whole.
I am of the opinion that the market will either be “range bound” or heading lower in the coming months.
Now that we have had a “rally”, we also have a point of reference to the downside. As the week progressed, I felt stronger and stronger that the buying power in the market was drying up. You can see a lot of stocks that took off Mon-Wed, but have since had trouble moving higher. I think there is still some room to the upside, but it is already getting limited. I can see prices being more attracted to the lows of last week than they would be to drifting sideways or breaking out higher.
Now, of course, Fly (happy belated 36th, btw) has mentioned the Chinese doing their thing and that would undoubtedly throw a wrench into my analysis. Therein lies the limitation of using charts/historical prices for analysis.
Anyway, lets take a look at the numbers I was seeing and why I chose to go short $HON. The following table presents the percentage of stocks in the Aerospace/Defense industry above the listed sma’s, versus the percentage of stocks in the Utilities industry (which I currently have ranked #1) above the same sma’s.
| Aerospace/Defense | |||||
| Date | % > 63 day SMA |
% > 42 day SMA |
% > 21 day SMA |
% > 10 day SMA |
% > 5 day SMA |
| 05/18/12 | 0% | 0% | 0% | 0% | 0% |
| 05/21/12 | 0% | 0% | 0% | 0% | 70% |
| 05/22/12 | 0% | 0% | 0% | 10% | 90% |
| 05/23/12 | 0% | 0% | 0% | 40% | 80% |
| 05/24/12 | 0% | 0% | 0% | 40% | 70% |
| 05/25/12 | 0% | 0% | 0% | 30% | 20% |
| Utilities | |||||
| Date | % > 63 day SMA |
% > 42 day SMA |
% > 21 day SMA |
% > 10 day SMA |
% > 5 day SMA |
| 05/18/12 | 55% | 45% | 33% | 18% | 9% |
| 05/21/12 | 64% | 64% | 30% | 24% | 64% |
| 05/22/12 | 64% | 64% | 45% | 58% | 85% |
| 05/23/12 | 58% | 55% | 36% | 27% | 61% |
| 05/24/12 | 58% | 61% | 52% | 61% | 79% |
| 05/25/12 | 61% | 73% | 61% | 73% | 76% |
So, what is this telling us?
The stocks in Aerospace/Defense are clearly under-performing in the face of a rally. Not a single stock made it above the monthly moving average (21 day). This weakness was really jumping out of the page at me. I’m looking for abnormalities in the data, and this was some pretty significant relative weakness.
After looking at the Aerospace/Defense stocks that I keep track of, I’m thinking “huh, these all look pretty shitty.” $HON, $SWHC and $TXT are where I choose to focus my attention based on the patterns they were forming. $SWHC looked a little too strong and $TXT looked a little too extended to the downside. All three patterns were really close to what I look for in a short setup, but I was having trouble determining where I would want to get out of those trades.
Shorting makes me paranoid as all hell, so I like to see obvious places where I’m comfortable letting things run to. With $HON, the intersection of the 20 SMA and 63 EMA (about a buck above the current price) was good for me.
Those two values don’t really mean anything to me, but if price is capable of closing above them, I’m almost certainly wrong in my assertion that this stock is going lower over the next week, so it’s a good place to step aside. If I’m correct, I’ll sell some or all if we get back to the lows around 55-55.25.
Again, this is a really small position. What I’m doing here is working on keeping my head down and focusing on making well-thought-out small trades. The point is to stop worrying about how macabre the P/L has been of late and get to work on the basics, maintaining focus and making good trades. Here’s the chart for $HON with some detailed annotations.
My best to you all.
-EM
If you can make it to the 22 minute mark, you will be rewarded.
7 Responses to “Honey…well…”
Rhino
Great Analysis! It’s hard to find ways to play this “sideways market.”
elizamae
June-August (and December) 2010 and August-Sept 2011 made my years…so I actually welcome this environment. Often times it makes more sense to me.
Everybody was a fucking genius in January 2012, but I actually found that market harder to read (for discretionary system-based trades) than this. Sure, I bought a bunch of $QQQ and held, but, hell, that’s no fun.
I’ll continue to post my thoughts on what’s happening, thanks for reading.
redman59
Like the analysis and that you got some rules for getting stopped. I agree in that a rangebound market seems likely going foward for a bit.
Also when volatility picks up like it has been, I like to do pair trades. In your short HON one could go long TDG (or som eother stock in the industry).
elizamae
I have never figured out (nor looked into) how to incorporate pair trades into my strategy. While it could potentially be useful as a hedge, my position is so small, it doesn’t even matter. This is just to try and build my confidence and get back into a rhythm.
Thanks for reading.
Schadenfreude
Good luck with your HON short, it could easily slam back down to $55. I had a couple questions about your trade. What is your reasoning for buying Sept $60’s if you are just scalping for a few days? The June series or even July has much more liquidity, tighter spreads and lower prices.
Market seems to be building a bear flag or B-C structure here. Either way, it is too tough to call and I am all cash until it resolves one way or another. Lots of people looking for more downside, so I won’t be shocked if we get a decent pop / squeeze next week completing B-C, which will also dress up the end of month / quarter before resuming primary trend down.
elizamae
I was thinking about buying the June 60’s, but those were between 85-90% intrinsic value (at Thursday’s close). I don’t buy OTM options, so those were out. Basically, I like close to a 50/50 ratio for intrinsic/time value, and the Sept. 60’s provided that for me. Again, I’m opening such a small position, that liquidity is not much of a concern.
For my strategy, these are the points where I have made the most progress in relative performance in both 2010 and 2011. The only question that remains is where the top of the range is going to form. I don’t see us going straight back up to 1400…I’d say 1340-1350 is the absolute max in the short term. However, I’m speculating that we see 1290 before 1330.
Thanks for commenting and reading.
elizamae
The OTM options I was referring to were the June 57.5.