Looking Inward for Clues

Sean McLaughlin
April 2, 2024

It’s common practice to follow the major stock market indexes to get clues into what kind of market environment we’re in.

This is important because when considering trades to put on, I would be better served if my next idea aligned with the current market trend and volatility profile.

But sometimes, the market (as one defines it – could be “the S&P 500” or “the Dow” or “the Nasdaq”) isn’t giving me anything conclusive to make a firm decision against. I’m getting mixed signals. This is common.

One way I have found to get a better indication of the market environment is to simply use my own portfolio as a guide.

At any one time, I may have as few as 10 positions on or as many as 40 positions. And there are a wide variety of strategies, timeframes, and directional biases among these positions. In other words, I’m somewhat diversified (sometimes more diversified, sometimes less). From these positions, I can quickly get a sense of what’s working and what’s not.

I might see that my longs are working better than my shorts. I might see that my longer-duration plays are inflating in value more than similar trades with shorter directions, implying that options premiums may be rising. I might see that my delta-neutral bets are performing best.

This is very valuable information that can lead me to add more trades similar to the stocks and strategies that are working and to stay away from adding in areas that aren’t.

There was a time in 2022 to early 2023 when seemingly every delta-neutral credit spread I put on worked. So I kept putting similar new ones on. And they kept working. I kept repeating until I had a couple that quickly didn’t work. When that happened, that was a good indication to me that something had changed in the market that wasn’t necessarily being signaled by the price of SPX or the large-cap stocks that drive the indexes. So I changed tactics.

Many times, we want to change the world around us, when in fact the best move is to look inward and direct our energies to change the way we think about something. Just a little tweak that quickly gets us in alignment with what is, not what we want it to be.

Same thing in the market. Instead of looking externally for clues on what to do next, simply look into our portfolios and look at our positioning to find out where we’re winning and where we’re fighting the market. Then make the adjustments to get more in harmony with the trend.

Trade 'em Well,

Sean McLaughlin
Chief Options Strategist
All Star Charts, Technical Analysis Research

Filed Under: