I heard something on CNBC yesterday morning that compelled me to write this blog today. Steve Ratner, former U.S. Treasury Auto Advisor, was part of a panel reviewing the hype/excitement over the Facebook IPO. Steve is quoted during this interview as saying, “Individual investors shouldn’t be playing the stock market any more than you should take out your own appendix”.

The old hedge (Photo credit: Wikipedia)

He went on to explain that he feels that we as investors are unable to take information about the companies we wish to invest in, do thorough analysis and come to a reasonable expectation for share performance going forward. He feels that investors should be in market index funds only.

An important part of making investment choices is to understand the context for the market and our current position in the long term economic cycle.

This is a discussion of my view of the US stock market today and its potential short-term direction. Today I will focus on recent market developments, including a look at the S&P500 (SPX) and its Volatility Index (VIX). My short-term view is that the market will remain stagnant to bullish in the short-term. A pullback, if it does occur, still represents a buying opportunity (see last Market View post on Mar 23, 2012).

Love to Surf? It May Assist You in Trading These Markets

I have compared trading stocks and options to many things. Some days the market makes me feel as though I am solving a puzzle with many jagged, sometimes complicated, pieces needing to be placed together as a cohesive whole. Other times I feel like a farmer – sowing new trades into my portfolio while reaping profits on others. Now that I live in southern California, I think my favorite analogy for the market is the ocean and its waves. The more we learn to work with the waves and the tides, and not against them, the more successful we will be in our trading enterprise.

Stocks, Stock Options, Exchange Traded Funds (ETFs), and Options on ETFs:

These instruments are grouped together as their taxation is generally the same. The default rule is the gain or loss from trading these instruments is capital gain or loss. For tax purposes net capital losses are deductible up to $3,000 against other types of income such as wages, retirement distributions, interest, and dividends. Any net capital loss above the $3,000 is carried forward to future years where it is deductible at $3,000 unless offset by future capital gains.

Over the past ten years there have been many more people taking steps to manage their own money, me included!  Why is this?

Chicken egg in straw nest (Photo credit: Wikipedia)

In early 2009 many  people bemoaned the huge declines in their retirements accounts.  They had worked all their adult lives to slowly build up their nest egg to support them in their golden years and in too many cases they suffered major declines in less than one year.  These were not isolated stories, since we had just survived the Bear Market of 2008.

These stories were all too familiar, since I had suffered a similar fate when the Tech Bubble Burst in 2000. The difference was that I was still actively employed in 2000 and had several years of full earning power to recover before my retirement.

The fundamental news is good – initial and unemployment claims are falling week to week, house prices seem to be stabilizing and the stock market is running.

Image via Wikipedia

So far, the turn of the calendar to 2012 has been a positive thing in our economy and markets. Looking at charts, we see that the SPY, an ETF that follows the movement of the S&P 500, has yet to have a down week this year. So, is it time to go in “guns a blazing” on the market? Do you dare jump on this runaway train so long after it has left the station?

I consider myself an evidence-based-investor. The benefit it offers is to minimize the influence of emotions on investing/trading decisions. As a serious investor I’ve learned just how much damage can be done when emotions hijack my brain!

According to www.dictionary.reference.com

EVIDENCE

1. That which tends to prove or disprove something; ground for belief; proof.
2. Something that makes plain or clear; an indication or sign
3. Law . data presented to a court or jury in proof of the facts in issue and which may include the testimony of witnesses, records, documents, or objects.

Image via Wikipedia

As a Coach at OptionsANIMAL, I work with students learning to apply options to their investing style. Students use virtual accounts to apply the strategies they’re learning for the purpose of gaining first-hand experience without risking any capital.

An important part of making investment choices is to understand the context for the market and our current position in the long-term economic cycle.

stock market (Photo credit: 401K)

This is a discussion of my view of the US stock market today and its potential short term direction.  Lets look at recent market developments, including a look at the S&P500 (SPX) and its Volatility Index (VIX). My current view is that the market will remain stagnant to slightly bullish in the short-term. A pullback, if it does occur, will represent a buying opportunity.

Before I begin my commentary, I want to emphasize that my ability to make money is not entirely riding on my thesis being correct. The OptionsANIMAL method, we do not simply rely on our expectations coming true. Rather we develop an exit plan detailing how we will use options to turn our losing trades into winners by making trade adjustments.

The best time to trade a straddle or strangle is probably not when you think it is the best time to trade a straddle or strangle.

Straddles (long call and long put at the same strike) and strangles (long call and long put at different strikes) are trades that take advantage of explosive moves in an equity. The problem with these trades is that they become expensive before events that can move a stock, e.g., earnings, product announcements, FDA rulings, etc.

Consider the January 23, 2012 earnings report on Apple (AAPL.) Most people expect a big move when Apple announces earnings. On January 23, 2012 – the day that they announce their fiscal Q1 results – Apple closed at $420.41. After the market closed, Tim Cook and the team presented fantastic results. Apple opened the next day at $454.44 and closed at $446.66. That is a huge move by any standard.

Traders use the straddle or strangle strategy when they expect a big move – but they do not know direction of the move. Generally speaking, long call makes money when the stock goes up and long puts makes money when the stock goes down. If you buy both a call and a put, you don’t care which way it goes – only that it move a lot.

To invest or not to invest? That is the question, surrounding the news of Facebook’s upcoming IPO.

Image by Getty Images via @daylife

The argument, of course, is reminiscent of the Dot-com IPO’s of the late 90’s and the hype involved with the Dot-com bubble.There is fear that Facebook is a new Dot-com, and that is what’s keeping many investors at bay.  There are two key differences in this case that will make Facebook’s IPO a better offering.