Moving Forward with SPY
Saturday, December 1st, 2012December 1, 2012
As of this moment my SPY position is 2,112 shares invested at $141.37 .
My SPY mechanical “marching orders” are to do absolutely nothing, I mean nothing until SPY is positioned below its 150 day simple moving average at a month end. Then sell the entire position at either a profit or loss, and….wait. Wait until a month end where SPY’s price is above its 150 day moving avarage and then,……buy. To do anything else at this moment would be the old trader me…….making it up as I go along……..Very difficult to backtest hunches and emotions !
But, that leaves me with a theoretical $700,000 sitting on the sidelines at a negative real interest rate.
With my impulsiveness and this situation as the backdrop, I read that Goldman Sachs has announced its December 2013 forecast for the S&P 500 which would put SPY at $157.50 . I am very much aware that, at least internally, Goldman Sachs makes no bones about not being a no fee consultant to the financial community. It has its own proprietary trading desks ( including S&P Futures ) and may very well position itself against its own projections and customers, never mind you and me. And, you can ” best believe ” that Goldman Sachs intends to make a great deal of money during 2013 via trading profit and transaction fees.
Goldman wants a very active market, so my take away on the $157.50 is Goldman wants, at the very least, to create market action the way a Las Vegas odds maker tries to create action with its opening line on an NFL weekend and I believe that is where the $ 157.50 comes from.
Goldman has set the SPY target at $157.50. Its up to you and me to come up with a target for a low. Lets do it in a prudent way, even allowing for an over the ” Fiscal Cliff ” market reaction….but not a Black Swan event.
If the 200 day simple moving average of SPY is $137.78, the difference between it and Goldman’s target of $157.50 is $ 19.72. Lets subtract that from $137.78 to arrive at a SPY low of $ 118.06. That would create a 2013 price range of $157.50 to $118.06. Is that reasonable ?
Lets give the range some historical perspective. The last time $157.50 was seen as a SPY price was during the 4th quarter of 2007 , before the banking crisis. The last time SPY was spotted at $118.06 was during the 4th quarter of 2010 as SPY was clawing its way back uphill to today’ s price of $142.16 from its March 2009 lows.
My question to myself is….is there a way I can participate profitably in a market whose mid range ( $137.78 ) without violating my SPY mechanic’s licence.
My answer is yes, but carefully.
Were I to sell 10 SPY contracts to accept delivery of 100 shares each contract ( total 1000 shares ) during December 2013 at a price of $128.00, I would be contracting to buy those shares at a price 9% below todays range midpoint. If I entered into that contract I would immediately receive the sum 0f $6.67 per share x 1000 = $ 6,670. If the price of SPY is lower than $128.00 at December 2013 expiry ( say $118.00 ), I would nevertheless be forced to accept the 1000 shares at $128.00 ( $128,000 ) and either eat the $10,000 loss or sit with the 1000 SPY shares until a beneficial event or time itself rescued me. That is a lot different than sitting with JPM at $52 for four years or an Enron, maybe forever.
Since my rationale tolerates anything but a Black Swan event, for me receiving $6,670 ( 5.2% per annum ) for tieing up $128,000 ( segregated ) for a year is like being paid to be patient enough to buy SPY at a price 10% lower than today’s price. If my mother had offered me that type of deal to sit still, when I was little, for certain I would have learned to be less impulsive and more patient than I am today .
But, I’m not doing anything yet….I’ll advise when, why and how as we move along.
Richard Maurice Gore