In today’s market Slice: In today’s Market Slice: Are Options Your Best Path to Trading Success, we look at the S&p 500 performance, Options, and more!
Market Performance: Where Are We Now?
As the markets close another up week, it is worth taking “stock” (no pun intended!) of where the market stands.
This chart can be found at barchart.com/stocks/market-performance for analysis.
Each line represents a different sector of the S&P 500. The black line in the center is the entire Index.
By definition, some sectors will be lower than the average, and some higher… that’s what makes it an average! What we see is that two sectors, Financials and Energy, have led the way as the broad market rose 36.12 over the past 12 months.
By the same token, Consumer Staples, Utilities, and Consumer Discretionary have lagged the overall market. Still, most stocks are trending above the 200-day moving average, as we would expect considering the market’s continued expansion. Look at this chart, found on the same barchart.com page referenced above:
There is a wealth of information here that can help traders keep an eye on where the market is headed next.
Notice the slowdown in the critical Financials sector, for example. While over 92% of companies in this sector are still above their 200-day average, when we look at the 5-Day, it is only 26%. If this trend continues, it could signal a significant weakening, in one of the sectors that has driven Index growth over the past year.
Similarly, the percentage of companies above the short-term averages in the Industrials, Materials, and Commercial Services sectors is declining. Does this tell us anything about the state of the economic recovery?
While this is not a red flag alarm, these recent trends could provide advance warning of any impending market reversal. Since we all know the market is overheated — to say the least — right now, it only makes sense to develop some systems for monitoring overall market health.
Our Strategy Team at FFR Trading is here to help you make sense of today’s trading environment. For a no-risk consultation, including a review of your trading strategy portfolio, call (800) 883-0524 , or schedule an appointment here.
Why Trade Options?
Unless you’ve been living under a rock, you know that options are exploding. The Options Clearing Corporation reported record options volume in 2020, with some 7.47 billion contracts traded. This didn’t merely pass to old record. It smashed it, with a 45% increase over the previous high, in 2018. This trend has continued in 2021, as millions of new traders flood the markets.
Why are options so popular?
Simply put, option trading allows investors to leverage assets and manage some of the risks involved in trading the markets.
“Buy low and sell high” is the oldest saying in the book. What option provide is the opportunity to profit regardless of price direction.
You can use options to cut losses, protect gains, and control large chunks of stock with a relatively small cash outlay.
Perhaps most significantly, options also form a key component in many “passive income” strategies, which allow you to make gains in the market without a heavy time investment.
At the same time, the learning curve with option trading can be steep. Many strategies are complicated, and, especially if you don’t know what you are doing, the risks can be significant.Obscure measures like implied volatility and the “Greeks” can challenge even a savvy, experienced trader. For newbies, it can be very intimidating.
That’s why we are offering Joe Duffy’s fantastic e-book, Target Zone Options: Trade Options Like a Pro, at no cost to Market Slice readers.
The Target Zone strategy utilizes spreads to limit risk. You’ll learn the essential technical indicators to use for finding good trade setups, why entry is more important than exits (this counterintuitive insight alone is invaluable!), and other myths and market mindset traps than can undo your trading success.
How to Get Your Brain to Do What it Needs to Do to Succeed at Trading
A brief excerpt from Target Zone Options: Trade Options Like a Pro by Joe Duffy:
Tens of thousands of books have been written about what I am going to tell you very succinctly here.
What science has learned about the brain in recent years has proven that the theories and practices of eastern spiritualists were hundreds of years ahead. If you are not open to this, then you are exponentially decreasing your chances of being a successful trader.
The brain works on a loop. Like a phonograph record with a well-worn groove. It does not want to change regardless of consequences, except in rare cases where the consequences are so catastrophic that the pain is worse than making a change.
So if you have ever asked yourself why you keep making the same mistakes, or how could you be so stupid again, or how can I get control of my emotions, or anything along these lines, rest assured that anyone who has ever traded has been through this.
This loop is how the human brain functions. And 95% of this occurs at a subconscious level. Getting out of the loop is as simple as observing it, and then interrupting it. Observing the brain and what it is doing is what the current rage around “mindfulness” is all about. With regard to trading, I see “mindfulness” as the ability to observe yourself as an objective third party.
When we look at another person’s behavior as an objective third party it is often very easy to see mistakes and solutions. We watch people all the time go down wrong paths that very clearly can only end one way. And other people watch us do the same thing! It is very easy to see when others are doing something that will not end well; very difficult to see it when we are doing it to ourselves.
Almost all the mistakes we make in trading originate from some sort of fear —- fear of taking a loss, fear of missing out, fear of not being perfect, fear of having to admit to being wrong, fear of failure, fear of success etc. — once the fear mechanism kicks in then the cerebral cortex starts to look to rationalize the behavior…
To read the rest of this chapter, and the entire Target Zone Options playbook, click here.
It can be tough trying to “go it alone” in the markets. One of the benefits of working with an FFR Strategy Advisor is that you gain a trading business partner to help not only with your strategy, but with your mindset. And if you didn’t grab our free e-book on How to Avoid Getting Burned in the Market, it’s still available for download here.
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