Barron’s had an article in the April 2nd issue on page 44 that covered the thoughts of Larry Jeddeloh, founder of an independent research service, TIS Group. Jeddeloh is calling for a 15-20% pull back this year in all indexes. He makes some valid points for why this could be coming. The usual suspects are all there, rising energy prices, slowing growth and inflation. All of that coupled with the sub-prime lending woes could spell a deeper pull back than we felt in Feb. Basically, Jeddeloh thinks the Feb pull back wasn’t deep enough and the optimism that sprung back in March is just making it worse.
I agree with that theory that people start feeling invincible when they find they can recover their losses in 2 months. That makes the risk not so scary and emotion starts beating out logic. It was perfect for me as a someone who writes puts. The short dip let me sell more puts at higher volitility only to come out spotless a few weeks later. This dip boosted my annualized YTD return to 40.5% according to Quicken. If Jeddeloh is right, I should stay liquid as my options expire over the next couple of months. All of my outstanding puts are sitting OTM and my covered calls are all ITM (except for NYX which I like longer term anyway) which leaves me in a perfect position if a downturn should start after April expiration. A sharp downturn is always bad for put writers, but a slow decline could work out perfectly as I’d get the higher volitility and have the opportunity to write some covered calls, maybe even ITM to earn higher returns. The next six months will be interesting and next year, which Jeddeloh thinks will be a year for a strong come back will be choppy I’m sure with the election at hand.