December 11, 2014
Not being part of the soon to be 3 year old VTI trade, I maneuver in the market using VTI and / or SPY strictly as a buy / sell signal.
For instance, I had written ( sold ) twenty plus SPY 195 December puts which I closed out for pennies on the dollar this past Monday. That was my exposure to SPY. My actions were saying I would rather own SPY at $195 than at $208, especially because I was being paid a premium to take the lesser risk of accepting delivery of SPY at a price 6% less than its 52 week high.
There are two ways I can approach SPY.
#1 Consider available macro data such as the falling price of oil in terms of what it means for SPY and act on my conclusions, or
#2 Wait until December 31 to see whether the month end price of VTI or SPY triggers a signal to sell my entire ETF and equities portfolios.
If I had a day job, I’d probably follow path #2 relying on back tested history relating to SPY’s month end performance. But, I’ve been retired since December 31 2006 so I am more of an activist when I believe what I see on the road ahead. If I can make a case to myself for early action, I’ll lighten up a bit. I don’t like sitting with accumulating losses.
In my last post I proclaimed that I had no fear of a Black Swan ( outlier ) disrupting the market because I have the Fed on my side with low interest rates almost forcing investors to consider equities.
I still feel the same way, except that it has been pointed out to me that the price of oil and the price of SPY have a history of travelling in the same direction. But, the market has been making new highs almost daily for all the reasons I enumerated in previous blogs despite the precipitous drop in the price of oil. But does that mean the directional divergence will continue ? !
I do know that oil represents 8.2% of SPY’s value. So, at some point, the falling price of oil must, at the very least, represent a head wind for SPY.
And, while lower oil prices are adding money to the USA consumers purse it is also having a negative impact on economies less able to withstand the oil price drop ( including Russia which is Europe’s largest trading partner ). So, what happens to Europe’s ability to purchase from the USA if it ‘s exports to Russia wither ? And, how does that impact 2015 profits of USA / SPY companies exporting to Europe…especially with the added barrier of paying for imports from the USA with a weaker Euro.
At some point the world’s problems become ours as we shoot for higher highs. So this has the potential to become more than a head wind.
In terms of my actions in the market, I have almost no SPY exposure because of the Puts I retired.
Overall. I am now a little over 50% invested in the market and geared to buy and hold or liquidate on December 31. I like the quality of what I am holding, but, again, I don’t like the feeling of being submerged if I think the dunking could be more than a temporary phenomena !
I am holding Sector ETFs and some individual stocks which conform to ” smart ” criteria and depend on USA business rather than exports etc..
The Sector ETFs I’m holding are XLV ( health care ) FBT ( biotech ) IYT ( transportation ) and XLU. The equities I am holding are TWX, BX, UNH, CVS, DIS, DFS, RTN, LUV, C, and NOC.
What I am learning is to never say never about owning equities. My equities have outperformed SPY since November 1.and I am gaining confidence about how to reduce the specific risk of equities. But, SPY should always be a significant piece of my portfolio
Richard Maurice Gore