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Today I want to share with you about how the stock market plays tricks on you during the holidays.
That's what I'm going to cover here as we approach and we get into December and shorten holidays and trading with lighter days. I'm going to share with you how this market can play some tricks on you.
Keep in mind all these examples are for educational and illustrative purposes. They're not recommendations to buy or sell any stock or security. I think by now you guys should understand that. But to be clear remember, these are for educational purposes.
Quick News & Updates
Before we get into our lessons of the stocks, I do have some news and announcements real quickly to share with you.
The first main thing is live classes and schedules are posted. I've done this for this next year coming up. Go to the Traders Fly website and take a look at the live classes button right at the top.
Right there I've created a mini schedule. These are tentative classes and events that I'll be doing. That includes some of the critical charts, and these, of course, may change depending on market conditions.
If market conditions accelerate meaning there's more activity than maybe I'll add a few extra sessions. Also, I've scheduled some webinars right here. We'll be doing more webinars and video classes that I'll be getting into here shortly.
You can register for these even if you have a regular membership. But since we'll be going more into video-based memberships here shortly, we'll be having and creating a secondary membership. That's because the cost to run webinars and to run these sessions is much more expensive.
I'm looking to have some free upcoming live classes for newsletter subscribers. If you are not on the newsletter list make sure to get on it so that way you can see where to register for these events.
The new packages for the critical charts I'm going to start them out at right around $35 at a discount. That'll be a promotion for a few weeks that we will run and then the price will increase.
The next thing is the accelerate your stock market education course. I've reworked that course entirely from the ground up. The concepts are similar, but I took it from scratch and reworked a lot of the material to go more in detail.
If you're interested in this course, I would recommend you go on the Rise 2 Learn website and buy it. Because if you have the old copy or the old version of this course, you will get access to the new version free.
Stock Market During the Holidays
Take a look at the market here. If you look at the Dow Jones Industrials, you'll see that they keep talking about this Dow Jones 20,000.
In reality for regular traders or investors, if you're active, you don't care about the number 20,000 or 15,000. It doesn't matter actually.
What you're looking at is the expansion of the move. Here as I look at it I see the move, and the expansion of this move is pretty steep.
That's the thing that concerns me. The other factor of it is that we do have a significant volume that came in. That's a positive sign. However, the expansion is still quite massive.
I'm bullish looking to the upside, but I do look for a pullback. When other people are euphoric, you want to be the one taking profits.
Things don't go up forever. You know that in the stock market. If you've ever been around for more than three months you know things don't go up forever. These are not normal conditions.
A lot of beginners think they're geniuses. And you'll see there will be a pullback. It's a question of when.
Pro tip: Be humble on what's going on and what's happening. And in December, the market will play tricks on you. We have shortened trading time with the holidays. There are fewer days that are traded, and the liquidity is less.
All those things play a role, and there's a reason for that. You have to remember that when we start looking at the market people are looking at their taxes. That if they can hold out a little bit further, it's all about that taxes.
Maybe you're a big trader for a large corporation. Then you're doing a lot of money management. The taxes between short-term capital gains tax and long-term capital gains tax is vast and dramatic to your profit. So I'm going to share with you some insight here.
Take a Closer Look at Dow Jones Industrials
As we look at the Dow Jones you can see this one broke out in a big way from that 18,600 level. And we powered and rocketed higher. They did some breakdowns here of when it broke to 10,000, and you can see what happened as we broke the 10,000 right around this level.
We then got under it, retested it, rejected it and got down to about 7,500. Then broke out again above it above the 10,000 and then back sold off.
Even if you break out of that level, you can see that you had some severe sell-offs as you start looking at things. You have two sell-offs on that chart.
We had more expansion on this side, but the sell-off came pretty big. Remember now the shorts are piling in.
The same thing up there. We might get this expansion move and then you could get a nice little pullback as well. We'll see if that plays out. For now, things will be stable because they're waiting for this month to close out. But we'll see what happens in January after the inauguration.
SP-500 - The Same Concept
If you look at the daily, we're starting to get some sideways consolidation. This is healthy for the market to be able to move higher you need sideways action. Or you need a pullback. Here we're getting some sideways movement.
We get a little pullback and I won't hesitate to buy more because the market has shown you it's moving to the upside. I'm looking for value buys to buy more to get more expansion to the upside.
Maybe there's heavy selling that comes in, and you see a massive down bar 2-3 days after days like this one you know then I might be a little more cautious. I might put on a few shorts or hedging positions. It can be the case that there're regular bars that are pooling back. It's slow every day, and you see some selling, but it's slow in that case it's a value buy.
If you see something with light that's normal profit taking, caution pullback, it's a little more standard. Keep that in mind. You're looking at the speed of the action as well.
Pro tip: I would expect this to sell off a little bit in January maybe. We'll see if that plays out only because we're so far extended. But if we get more sideways movement and we continue moving sideways for another couple weeks, then I could see it moving higher. It all comes down to how much energy we can build.
What's the Case With Apple Stock?
Look at Apple on the long-term. You can see rejection, and I'm looking at Apple because I'm looking at the leaders.
These are the stocks that generally lead. People love these stocks because these are the ones most people are piling into. That's why I'm watching the leaders.
These leaders are now changing. They're changing into other companies.
Well, more than likely. Probably not. I mean the people that are looking to get their jobs back in the manufacturing some may get some jobs back. But most of them are not going to get their jobs back.
That's where we're heading in the global economy. We're in a global economy and China, and other countries are producing things at a cheaper cost.
The American worker is not going to make t-shirts as they do in Bangladesh for $2-$4 an hour. They're not going to do that in the US. You can't afford it due to the standard of living.
You have to start looking at these things that how they're playing out. Here is the same thing. The banks are running up due to deregulation which is fine.
What about Bank of America?
Bank of America could go a bit higher. I would still say $25 is fine. If it gets to about $25-$30, it's okay, but after that, once it hits around $30 level, I would say it's way extended.
That's because you're trading now based on the earnings the valuations. You're trading in 2018 earnings 2019. You're so far extended that the earnings have to support that. As we get into the January month with earnings, you're going to see how things play out.
The first earnings quarter is that you won't see a lot of things. That's because they're trading based on hype. They're trading based on deregulation. But as you get into April and June, you're going to have to see the second and third quarter earnings start to support that with the new administration.
That's where I see could have some trouble. In January in these bank stocks, you might not see any problem.
Capital One Financial
This is the monthly chart. You can see we're cutting into some significant resistance levels. That run-up is quite high for what it should be.
It's not to say that it can't go higher. It's saying what's real and what's realistic.
Well, some people can jump off pretty high, but how high is too high? Think about it.
These kinds of things are a little extended. I don't chase these things. And I let it go. When I used to pursue these things that's when I got burnt, that's usually where the problems are.
Leading Companies - Facebook, Amazon
You can see we're doing the same thing as the market right now which is moving sideways — Amazon the same thing. We're almost building an ABCD pattern into the 650.
That's possible. Right now we have that support level holding it up. But it could roll over.
What's Going on With GoPro?
The stock opened up. People love this thing because after a few weeks here of consolidation almost a full month we exploded.
This is what the market is doing right now if you want to compare and contrast. We exploded, and we're starting to go higher. You reach a specific top or climax at the very top.
As you get into this level, there's a week of consolidation. And then we roll over. Then you get people buying back some of those things. They think that the move is made. And it's a good value, and then you get the next step down.
If you do not see it, this is the ABCD pattern. You can see this stock is in the gutter for the last year.
That's what happens with these stocks and companies that I don't trust any of them. Most of the time there are very few people I even listen to on TV or anything like that. I don't care if they sell underwear or umbrellas it all comes down to that price action. And it all comes down to what people want in the stock.
Banks & Health Companies
People were piling into these banks. But when it gets a little euphoric take half off. You need to do that because that stock could come back and nothing be wrong with it.
If the administration and if these rules and regulations continue to do fine these banks can charge anything they want.
It's like health insurance companies like Humana. Why do you think they run up so much? Because they can charge a fortune for premiums - there's no regulation. That's what happens in the stock market.
You get that initial euphoria. We can do anything we want because most people aren't going to have health insurance. But they'll charge a premium for it. That way they'll make more money.
As they make more money, their stock price goes higher. And as we hit into higher prices, you're hitting into the 2015 all-time highs. Then you reject it because you do some profit taking and then we might bounce.
We'll see, but that takes time. That's the case because then you get earnings and other factors that come in. All of these factors play a huge role.
Getting Into Investment - Ameritrade
People are getting some of them are getting into a due to euphoria. This is the retail investor. They're usually the ones that are often late to the party.
The way the big boys are trading:
Here's what happens in the holiday months. If you're so tight to the next year in January, there is the major sell-off.
If they're so tight into having good profits, they don't sell the stock. That's because we have less trading days which means they're able to hold through a few days. All they're trying to do is they're trying to hold on to those for a few more days or weeks that we have left.
As you have half day trading and days of closing and trading that all continues to time decay. And if they can wait two more weeks, they're paying a lot less on their taxes.
Here's what I mean:
Capital gains tax is 40%. And if they can push it through and hold through until January, they could save 20% by going into long-term capital gains tax.
Well, they typically will buy puts or sell upside calls on it to counteract the difference. That way when you lose or the stock even pulls back even in December it offsets that.
Their losses are so much smaller even in December if you get a pullback because they have puts. And they have sold of the calls only for the fact that 20% that they would lose if they sold the stock and took profits is going to be that much higher.
Take a Look at Trading Panel
We're looking at a trading panel and platform and let's say I'm trading Disney. Remember it's for educational purposes.
For example, I bought 500 shares. Let's put this in and place this order in. This is simulated trading so no big deal.
If I look at the analyze tab and I look at Disney, here's our profit picture. Maybe you don't know what a profit picture is. Well, it tells you the graph of the move within that stock.
Our Disney price is at the bottom, and our current price is in the middle, and our zero-line is the yellow line.
When we're above zero-line, we make money, and if we're below this, we lose money. This is the amount of money that we make (on the left).
As I moved to the right and if Disney goes to 109 I make $1907. If Disney goes down to $102, I lose $1689. You can see how this profit picture works.
The red tick is my current price. I can reset that and make it a live price. I'm up $45 because Disney went up since that point. You can see how it's working out right there in my favor for the time being.
How Do Things Work?
Here's what they do. They don't want to sell it because they've been in these positions for quite some time. The market will even if it pulls back it's going to be minor for the potential of it pulling back in January. I'm not saying it's going to pull back in January.
I'm saying they're trying to hold out until January if possible. Understand that's the big picture for them or even for me. If I have long term holdings, I don't want to sell my stock now. I only have about ten trading days to go. And then I can get long-term capital gains tax, and I make 20% more.
The next step is that I'm looking at this to see if I can hold out.
They do a couple of different things, but I'll show you the two simple things that they do.
This is why it plays a trick on your mind. You think that all the markets are doing fine and that the markets are holding up fine.
They can go into these options spreads on Disney, and we buy five puts. The white line is the current line (today), and the green line is at expiration in February. If I didn't want a lot of time decay and I had additional capital I could go to March or April.
Here looking at this you can see that right there if I go into April, you have a theta decay at $7 per day. If you're only holding it on for ten days, it's $70. It's not that expensive compared to if you get a significant pullback in stocks it could be a problem.
You do have that theta decay, but if the stock goes down, you can see you make about $500 if it goes down to 101 102.
However, you do have to compensate for that time value. If I move the day until December 31st and if it doesn't move and that the price is right there I lose about $70.
But if it does go down at least, I could potentially for a catastrophic event at least make $200-$300. That's not big money, but it helps compensate these 500 shares that I have.
Let's say the stock goes down to 100 and we tank. I would lose $2616, but on holding my puts, I would make $700. Between both of these, if you combine it, this is what the profit picture will look like. If I had the puts right here, I would lose $1855 at 100. It pulls back $5. I would lose $1855.
If I didn't have the put, I'd lose $2677. I hope that makes sense. You're losing less a money by $1,000 - pretty much, give or take.
Think about it if I got rid of the stock I would have to pay an extra 20% more for the tax implications. This is one of the things that they do is they try and hold on for another ten days and get through it.
That way they don't have tax consequences. And then if they see it rolling over, they can be out. Things could accelerate here still. If things do accelerate in a big way then, of course, they would get out of the positions. But buying some puts is one way to counteract that.
What Else It Can Be Done?
The other way that they counteract that is they could sell upside calls. What this does is it gives me again as the same thing a downward direction based on that single call. And I go to March because now I'm looking for time decay.
I make $1 a day, but if it also goes down here, I have the Deltas to counteract us. So I have 13 Deltas, and I can sell five of these because I have 500 shares (each contract is 100) and now that stock could go to about 115. And I still would collect the premium for this.
However, I can also make $310 if this expires in March and it's under 115. If it gets to 100, I make $250. I could do the February (even the January) but the premium is not there. You can see the premium in January is only $5 to go to the 115.
It comes down to the premium. Here if I did the Marches you could see now pulling back to 100 I make $252. That is not as much as buying the puts, but here you can also allow this to expire in March and collect $310.
It's a different way of playing it. When you look at it this way you can see your profits on the upside are still capped. Once it gets to 120, you only make $5195 since you're selling calls.
Your stock could be taken away if it gets beyond that 150 strike price. If it pulls back to 100, you're going to lose $2360, whereas without those you'd lose $2613.
You're making $200 from those selling the calls. It's not a full $700-$800 like buying the puts because when you buy the puts, you have much more Delta in them when you're purchasing those puts. And depending on where you buy them, but you can see what's happening. I'm still counteracting for the downside move.
The thing to remember:
The big point of why the prominent money managers do this is to offset that 20% of capital gains tax that they could save.
That's because if they went ahead and sold this stock right now, they would pay an extra 20% depending on their tax situation.
The market in December: They might take some profits to reduce the risk, and you might see a little pullback. But they don't want to do it too much because the problem is if they take a lot of profits they'll tank this market.
And then they also will be forced to get out of the position. The next thing is to get short-term capital gains tax and get out of their positions to lock in their profits.
It hurts their bottom line and budget. What they can do is as long as they can keep it propped up for a little bit or hold on to that position for about ten more days then eventually they lock in an extra 20%. And a few of those days as you know our holiday days.
They still are in that position. And then come January time, and there is a pretty good sell-off. I'm not saying this is going to happen this time, but they try to wait for that. They're doing that because of that 20%.
If you look January, this was small and subtle. But you can see it again in January what happened right in 2015.
You have to do your evaluation of this — the same thing you'll notice in 2013.
Things to Consider
The markets are acting a little choppy with 10-15 trading days remaining as we get into January. You're probably not going to see a significant pullback before then because they want to prop it up to get the extra 20% on their capital gains tax.
They're looking to save that additional money. It's expensive for them to sell it. And especially when you're dealing with millions or billions of dollars 20% is a significant amount when it comes to their pocketbooks.
That's what they try to do. They try to hold on to this and move it sideways. They're waiting for time to expire, and this is what's going to happen. It's probably going to be slow up until the end of the year.
We'll see if you get some panic motions and attacks, you might see it sell off in a big way. However, I don't think you're going to get that in this month.
Right now it's acting slow. We are getting a couple of red days simply from the expansion to this upside. But otherwise, it's looking like sideways digestion.
In this post, we've shared with you how this market can play some tricks on you as we get into December and holidays.
I hope that you've learned how to act when it comes to the stock market during the holidays. Also, you've seen what you have to pay attention to and what to avoid as well.