End of the Month Summary – July 2014

July ran fairly flat for me until the 31st when the S&P 500 fell 2% and the Russell 2000 and the MidCap 400 fell even more.  By the close of July’s trading my account finished lower for the month.  As I’ve been expecting, a weaker month was due to hit.  Thankfully, I’m not close to being fully invested.  I did sell an extra couple of UWM naked puts far out-of-the-money 10 days ago that are now sitting on a paper loss, but they have a good bit of room to handle further weakness still.

I ended July with a Net Liquidation Value (NLV) of $104,809.33 and a Net Asset Value (NAV) of $104,932.93 according to Interactive Brokers (IB) after finishing June with an NLV of $106,424.95.  That gave me a loss of $1,615.62 (~1.52%) on paper for July and a realized gain for the month of $651.83 on four closing trades.  I received no dividends in July since I still don’t own shares of any stocks or ETFs in this account.  Quicken reported that I have $104,932.92, a penny less than IB’s reported NAV.  I didn’t take the time to research which trade(s) downloaded incorrectly.  This is such a common error with Quicken and it’s so small that it’s not worth researching usually.

I only have two options set to expire in August, FEZ $44 and DIS $82.50.  I expect to be assigned my two FEZ puts if I don’t exit before expiration.  The ETF moves quickly and could make it back above $42 easily.  If it does rally some, I plan to buy these puts back and sell new ones at a lower strike.  $42 is going to be a big line to watch for FEZ.  Not just because it would push me to a profit, but also because the 20 and 200-day moving averages are both showing resistance close to it.

My single DIS put looks safer.  It’s still trading out-of-the-money by more than $2.50 and has multiple points of potential support before my strike comes into play.  I might close it early and roll it farther out and to a higher strike.  That decision will be based on the price movement for the entire market, not just DIS, over the coming weeks.  If it looks like sentiment will continue to sour, I will consider closing my DIS put and leaving the cash as dry powder for future trades at lower prices.

In my End of Month Summaries over the past two months, I wrote that felt the need to add more exposure.  I never followed through with that plan with too much conviction because the charts didn’t look like they were favoring aggressive investing.  I won’t go in with the same game plan in August.  I want to wait for the right opportunity and then I’ll jump in with both feet.  There’s no need to be impatient.  I have enough puts in-the-money to give me decent upside if the market turns north.  If it stays in a slump, I’ll be happy not to have too many irons in the fire.

It’s too bad I didn’t raise the strikes on my SPY October $180/160 long put spread as I mentioned last month that I might update.  I’m glad I still have some protection against a larger correction, but I don’t have much protection against the more likely shallow correction.  If all of my naked puts were assigned, I would be 83.48% invested in this account (78.57%, if I include my long put spread hedge).  July’s ending allocation is 5.21 percentage points higher than how I closed out June.

This is my asset allocation in my IB account as of the end of July:

• Large-cap ETF: 8.83%*
• Mid-Cap ETFs: 25.28%
• Small-Cap ETF: 28.24%
• International: 8.40%
• Oil: 0.0%
• Individual Stocks & Other Sector ETFs: 16.65%
• Bonds: 0.0%
• Short ETFs: 0.0%

* Does not include put spread hedge on SPY.

These are my returns according to Quicken through July 31, 2014:

• YTD Return: +4.91%
• 1 Year Return: +13.41%
• Average Annual (not cumulative) Return since November 18, 2009 (when I opened my IB account): +8.34%

According to Morningstar, here’s how I compare to the major indexes (including dividends) through the month’s last trading day, July 31, 2014:

• Dow Jones Return: YTD change +1.20%, 1 year change +9.39%
• S&P 500 Return: YTD change +5.66%, 1 year change +16.94%
• NASDAQ Composite Return: YTD change +4.63%, 1 year change +20.50%
• Russell 2000: YTD change -3.06%, 1 year change +8.56%
• S&P Midcap 400: YTD change +2.90%, 1 year change +12.89%

The VIX ended the month at 16.95 and the VXN ended at 16.82.  These readings are up more than five and four points from last month’s end.  The bump higher in volatility helps increase the prices of options, but then again, there is more perceived risk in the markets right now too.  Watch for the VIX to break above 20.0 before worrying about true fear entering the market.

The CBOE SKEW Index finished July at 128.71, 10+ points below the end of June and well below the peak on July 3 of 142.28.  The close below 130 on the last day of the month ended the longest stretch for the SKEW above 130 that I could see on the 20-year chart available on TD Ameritrade’s site.  To a SKEW reading novice, this number seems to me to highlight the growing fear of stocks late into a bull market that hasn’t been hit with a 10% correction for a long time.  As seen in yesterday’s sell-off, traders have their trigger fingers ready when any news disrupts their planned news cycle.