December 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