say something big might be around the corner is to impart a sense that the
"something big" is really something bad. That may not necessarily be the case, yet
it is easy to think as much given the prominence and the tenor of headlines these
days regarding Greece, China, and the hobbled state of the U.S. labor market.
Either way, it speaks volumes that the low trading volume shows no one appears to
be in a hurry to have a first-mover advantage for either something good or
something bad happening. The overriding result has been a trade of indecision
where one day's big gainer is the next day's big loser.
We do not know if something big will be higher or lower. However, I would be
concerned that the market is ready for a pullback. You may want to watch for this
and purchase some portfolio protection such as a VIX option since they are cheap
at this time.
Fund of Funds Portfolio
The increase in markets during March has created opportunities to get fully
invested in the FOF portfolio (see chart below). You should position your portfolio
with 20% in each of the following ETFs: VNQ; PSP; VWO; VB; VTI. All of these
ETFs are priced above their 100-day moving average. Small caps continue to
outperform large caps through the first 3 months of 2010. The hedge funds are
having a better year as the private equity ETF (PSP) is looking good thru March. In
fact, PSP is the yearly leader in all FOF asset classes with a return of 8.67% so far.
The emerging market ETF (VWO) has moved back into the top five for April
investments. Aside from VWO, the majority of ETFs are investments in the U. S.
which is a good place to be now as Europe is where the uncertainty is in the credit
Covered Call Investments
The table below lists the covered calls for May 2010. All of these stocks have met our
proprietary covered call selection criteria. This list is heavily concentrated with energy and
financial companies. HK, WLT, TCK and VALE are strong energy covered calls that should
hold up as crude oil just broke out above the $82 level. Hartford Financial and MBIA are nice
financial picks with this industry looking strong in the markets. As usual, check the option prices
as they can change significantly coming off a three-day weekend.
The calendar spreads this month include ITW and NSC. Both of these stocks are in bullish
trends and should remain strong through the decay time. This strategy is to sell a short month
call and buy a LEAP call in January 2011. You should sell one call for each LEAP call
This month’s condor is on the SPY ETF for MAY 2010. The SPY is trading at $117.8 as of
close on Friday. We want each wing of the condor to be one standard deviation away from the
Call wing: sell the May 124 call and buy the May 125 call for a total of ($0.13).
Put wing: sell the May 111 put and buy the May 110 put for a total of ($0.11).
The total credit is ($0.24) per condor. The margin requirement is $0.76 per condor. This creates
a total return of 31.6% at expiration. There is a 14.6% probability of SPY closing above 124 and
a 11.4% probability of SPY closing below 110. You may want to watch as SPY may be ready
for a slight pullback to around the 113 mark.