This month’s Trading Journal commentary will review a new chartable index – tracking the number of S&P 500 companies trading above their 200-Day Simple Moving Average (SMA). Below I charted the S&P over the past 20 years and annotated some of the most egregious Feds machinations.

Recession Man Cometh?

What is happening to the doom and gloom of the looming recession? “Worse than the 1932s by the end of 2022,” I heard early last year. “2023 is going to look a lot like 1973-74,” came another late 2022 prognostication. Now the prediction is to expect the recession to have a big impact during the second half of 2023. There seems to be big talk about how the Feds are rubbing-out the US economy.

Commentary Contents

• S&P 500 Corporations
• $SPXA200R Index
• 200-Day Simple Moving Average (SMA)
• Free Markets
• The Fed’s Rub-Out

S&P 500 Corporations

The S&P 500 is a stock market index that tracks the 500 largest companies in the U.S. This index represents about 80% of all the capitalization in the country. And the S&P is widely considered the best indicator of how all the U.S. markets are performing. This month’s Journal commentary will review a new chartable index – tracking the number of S&P 500 companies trading above their 200-Day Simple Moving Average (SMA).

200-Day Simple Moving Average (SMA)

When a corporation’s stock trades above its 200-Day SMA, it is in an uptrend and has positive momentum. This means that the economic environment for this corporation is strong and growing. And when most of the S&P 500 corporations are trading above their 200-Day SMA, then the nation’s economic outlook is reassuring. If the S&P 500 is doing well, then our 401Ks are likely going well – as well.

$SPXA200R Index

Below is a chart showing how many of the S&P 500 Corporations had their stocks traded above their 200-Day SMA over the last year. A couple of times from June to October, more than 80% of the S&P 500 was struggling, and their stock was trading below their 200-Day SMA.

The good news, from the lows in October 2022, more and more corporations have been back on the incline, and a bonafide recovery seems to be on its way. Today, more than 65% of all the corporations in the S&P 500 are now trading above their 200-Day SMA.

Free Markets

The intrinsic nature of the markets is to rise (see How To Make Loss Resistant Vertical Spreads – Market Force). So if we could leave the Markets alone, they should consistently perform. But the Markets can be easily manipulated by malicious individuals or unprincipled corporations. So we need Federal rules to help secure and ensure free trade in the Markets. BUT…

Inept Federal action or a geopolitical catastrophe somewhere in the world will pull the rug out from global markets (most typically, it’s the inept Feds). And for these past three years, I point my boney finger at the Feds.

The Fed’s Rub-Out

Below I charted the $SPXA200R over the past 20 years and annotated some of the most egregious Feds machinations:

The massive 2020 COVID lockdown was a mistake, and the over stimuli of the economy in 2021 is another. The lockdowns shuttered manufacturing. The enormous stimulus packages allowed nonproducing consumers to buy up available supplies. As a result, inventories flipped, supply chains crashed, and the rebuilding of supply has raised prices to near untenable levels.

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Other Posts from Options Trades By Damocles

This Week’s Market Sentiment

This Market Sentiment Section is typically completed by midday Monday morning. By the time this journal is published, it will be mostly old news.

(As of 02/24/2023)

This section reviews four indicators:

• Ecopolitical Influencers,
• Market Sustainability,
• Investors’ Sentiment,
• Market Trajectories.

Then, I will use these indicators to help guide my trading decisions for this week.

Each of my four indicators will “vote” on a DEFCON (Damocles Options Trading Readiness Signal) level, exclusive to that indicator. Then, In the final sub-section, “My sentiment for this coming week,” below, I’ll compile the votes into a DEFCON level for the week.

Ecopolitical Influencers

Ecopolitical (Sociopolitical-Economics) Influencers (EPIs) can be breaking news, political machinations, Federal Reserve musings, or even Twitter Trends. They are events that can abruptly change the dynamics of the current markets. U.S. political polarization’s impact on Wall Street cannot be glossed over.

EPIs are like a lit fuse to a bomb. The fuse can be fast or slow, and the bomb can easily be a dud. But I need to watch this closely as an indicator. The EPIs can significantly disrupt all the other indicators at the drop of a tweet.

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Yikes – Yawns – Yays

• US heading to war, somewhere – Yikes
• Debt Ceiling debate, shades of 2011? – Yikes
• PPI advances 0.7% in Jan – Yikes
• Russia suspends START ready – Yikes

• Recession man cometh – Yawn
• Feds may raise interest rates 0.5% – Yawn

• Broad eco-news surprisingly soft – Yay
• Retail sales up 3% in Jan – Yay

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Geopolitical

• US sending tanks, Germany sending tanks, Pollen sending tanks. But that’s just not enough. They want Western fighter jets, Western anti-missile systems, and other modern western war technology. Ukraine and Russia are building their arsenal for an expected major offensive. The Ukrainians are determined to pull NATO into a full-fledged war with Russia.
• China is bound and determined to subsume Taiwan (like Hong Kong) at the expense of a full-fledged war with the US. Are the war drums getting louder?
• Last December, the Democrat Congress passed a massive $1.7 trillion omnibus bill to pay government obligations until the end of the fiscal year. The problem – it pushes the federal debt above the $31.4 trillion statutory limit. Now the Republican house has to increase the limit or force the government to renege on handout promises. Will this year be like 2011? By April of that year, the markets were up 9.1%, Then, the debt ceiling battle went to the brink when America’s credit rating was downgraded and the bottom fell out of the markets. By Oct, the markets were down 13%. I should keep a close eye on this pending issue over the next couple of months.
• Under the ominous message that the Russia/Ukraine war will escalate and suck more countries into active participation: Russia suspends participation in the New START Nuclear Treaty, China’s willingness to offer lethal military aid to Moscow, Putin vows to continue Ukraine offensive, Moscow’s plan to annex Belarus, and more. After a year of Moscow’s operation to “denazify” Ukraine, Europe appears closer to World War III than ever.

Socioeconomics 

• Retail sales for everyday goods (gas, food, home maint.) rose more than expected in January (3.% from the 1.8% expected). This unexpected increase signifies that consumers are willing to pay more with the still sky-high inflation. More people are eating out, more cars are selling, and home furniture sales saw a 4.4% increase. This resilience gives credence that our inflation may have a soft landing consumers start to settle into the “Climate Change Economy” (quote from Biden).
• As a precursor to the CPI, the PPI popped 0.7% last month after a 0.4% decline in December. So the expectation of a moderate 0.25% Federal Interest Rate hike has also popped out the window. I now expect to see a 0.5% increase in the Federal Discount Rate during this month’s Fed Meeting. This unexpected rate change will put pressure on my existing Vertical Spreads (marketers fell > 300 at this PPI report) and may delay me from opening new positions this week.
• Most Marketeers are hoping the next round of Interest Rate hikes will be the more moderate 0.25%. But comments from Fed Presidents Bullard and Mester are pouring cold water on that notion and pushing a 0.5% hike. I need to keep in mind that 0.5% is a whole lot better than the series of 0.75% hikes we had through 2022.

EPI votes a DEFCON 3

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Market Sustainability

This is a revamped section inspired by the “Kenny Rogers” strategy.

Market volatility is inching higher as it has risen above the 20% line for the past two weeks. But the mild Put/Call Ratio over the past month suggests that the Marketeers are not too worried about rising volatility. However, a rising VIX is like a shortening fuse – it may not take much to set the Marketeers off. With the Feds meeting nigh, and the boost in Retail Sales being counterintuitive to the Feds inflation action, I’m putting caution first.

Market Sustainability votes a cautious DEFCON 3

Investors’ Sentiment

Marketeers are consumers too. And when the economy is humming, investments are smoking. Conversely, when the economy is threatening their portfolios, they tend to run for cover.

Consumer Sentiment Index

A low Consumer Sentiment Index is a general dissatisfaction with our current management of U.S. economic policies. This dissatisfaction will imply that something has to change. A high satisfaction rating suggests approval of the current policy management and implies market stability. Surveys of Consumers (umich.edu)

February’s preliminaries continue the Dec/Jan bounce with another 2.3% jump.

Misery Index

With the copious amount of economic pressures throughout the nation this past year (inflation, employment, interest rates, etc.), knowing what the Misery Index is and what direction the index is moving can cast a long shadow on Marketeer’s sentiment. Numbers are coming from the U.S. Bureau of Labor Statistics (bls.gov).

• Inflation Rate: rose 0.5% in Jan. (more than expected). One year increase was 6.4%, flat from 6.5% last month ¹.
• Unemployment Rate: Jan rate = 3.4%, down from 3.5% in Dec.
• Misery Index = 9.8% (6.4% + 3.4%), down from 10.0% last month.
  • (Note: Ideally, the Misery Index should be well below 10% for a growing economy.)

¹ A year ago (Dec 2021), inflation was already sky-high at 7.0%. So being at 6.5% now means that we are actually up by 13.5% over the past two years (Biden’s Administration).

The Misery Index continues to be high as nearly half of all consumers believe our economy is moving in the wrong direction. But the temperature of our economy appears to be moving lower as our consumers start to regain confidence in our economic trajectory. The Misery Index fell below 10% for the first time.

I’m optimistic that we are now moving in the right direction but not so much to give this a DEFCON 3.

CSI votes an optimistic DEFCON 2

Market Trajectories

The S&P 500 is a stock market index that tracks the 500 largest companies in the U.S. This index represents about 80% of all the capitalization in the country. The S&P is widely considered the best indicator of how all the U.S. markets are performing.

The Russell 2000 Index is commonly considered an indicator of the U.S. economic direction due to its focus on small-cap companies. The growth potential of small-cap stocks is attractive to Marketeers when economic expansion is expected. These same small-cap stocks are also the first to be jettisoned at the start of economic turmoil.

S&P 500 (SPX) = 4,029 – up 1.2% from 3,973 last month.
Russell 2000 (RUT) = 1,910 – up 2.3% from 1,867 last month.

Market Performance

• Both indexes remained indecisively bullish last month
• Short-term moving bullish, with both indexes’ 9-Day SMA above the 50-Day
• Long-term turns slightly bullish, with the 50-Day SMAs slightly above the 200-Days.

The end-of-year market downturn is because, I believe, the Marketeers selling to lock in cap-gains losses for taxes (I know I did that). But once 2023 ranged in, many went on a buying spree to pick up discounted assets. The past 20 days has been a sharp reversal of the December selloff, hopefully, to but the trajectories mack into a longer-term bull.

Both indexes had a strong two-month recovery, despite the turndown over the last two weeks. The 50-Day moving above the 200-Day SMAs is a good sign of an inflationary recovery.

Market Index votes a DEFCON 3

My sentiment for this coming week:

Of the four indicators:

• Ecopolitical Influencers softening – cautious DEFCON 3
• Market Sustainability suggests a possible short fuse – cautious DEFCON 3
• Investors’ Sentiment shows a consumer base not excited about our economic future – optimistic DEFCON 2
• The market indexes are squeamishly bullish – cautious DEFCON 3

Both the S&P 500 and Russel 2000 indexes had a two-month solid recovery, and their 50-Day moving above the 200-Day SMAs is a good sign of an inflationary recovery (despite the turndown over the last two) as the Marketeers appear to be getting back into the higher-risk, small-cap stocks. But the VIX is rising pretty fast as new Fed actions are about to be announced. So this may be the calm before the storm or a sign that Spring is nigh. I am cautiously positive.

Trading Readiness Level for this week

cautious DEFCON 3

This Week’s Guidance

Inflation seemed to have peaked, and the market’s trajectories are weak-knee, long-term bullish. But the short-term trajectories (20 and 7 days) tell a different story. The RSI for SPX is below 50 and falling, suggesting that the current downturn could continue. Even though we are at a DEFCON 3, the short-term economic outlook seems sketchy.

• Be cautious with new Spread this week
• Follow the Entry Rules below

Profit and Loss Statements

(As of 02/24/23)

My Performance vs. SPY

Hypothetically, instead of depositing $28,000 in my Options Trading Account, could I have done better if I bought $28,000 of the ETF/SPY instead?

	Options Trading Account	SPY (Fictional)
Initial Investment (As of Jan 4, 2022)	$20,000.00 (Cash)	$20,000.00 (52.2972 shares @ $382.43)
Funds Added	$258.61 (Premiums, Int., Div.)	0.23 shares (Dividends Reinvested)
Funds Removed	-$14.20 (Early Close & Fees)	-$0.00 (Fractional Shares Sold)
Market Changes	-$340.59 (Open Spreads’ Fair Market Value )	$842.51 (Gain/Loss)
Ending Balance	$20,105.05 (Mark-To-Market)	$20,842.51 (52.2972 shares @ $398.54 CV)
ROI	0.5%	4.2%

Schedule for this Week

Goals for this week: (02/21/2023 – 02/24/2023) (Week #8)

• Document lessons learned or new thoughts in Commentary Section
• Open one or two Vertical Options Spreads
• Update Trading Log as trades occurs

Monday:

• Determine/update this week’s market sentiment section
• Review/tweak Trend-Channels for all stocks on the watch list
• Set target expiration dates for all Options as follows:
  • Bull Credit Spreads: Apr 14, 2023 (6-8 weeks)
• Look up Ex-Dividend dates for positions in/approaching ITM (MarketWatch/Calendar)
• Stage possible trades for all watch list stocks by 10:00 AM
• NO TRADING BEFORE 10 AM. (Let the market find its direction after the early trading.)

Tuesday – Thursday:

• Review how yesterday’s staged trades moved. Then, adjust premiums to take advantage of movements.
• Submit a couple of Spreads, but keep a close watch. If one is accepted, cancel the others (we want only one new active trade open on any one day).
• Be mindful of this week’s rules.

Friday:

• Review the total technical dollars at risk for this week. If significantly below $500, then submit additional spreads if prudent.
• Update and post a weekly journal (this blog) with any lessons learned or strategy changes.
• Watch one Webcast or take one online mini-course to be completed by Friday.

This Month’s Trade Activity

(As of 02/24/2023)

Volatility was too high, and the ETSs were too intense to feel comfortable if the markets could sustain any one direction for the length of time. I should have come to this position back in March.

Spread Count Summary:

	Year 2023	Month Feb	Week #8
Vertical Bull Put Credit Spreads	9	3	0
Vertical Bear Call Credit Spreads	0	0	0
Iron Condors	0	0	0
Total	9	3	0

Current Dollars at Risk:

	Year 2023	Month Feb	Week #8
Vertical Bull Put Credit Spread	$7,239.	$4,352.	$0.
Vertical Bear Call Credit Spread	$0.	$0.	$0.
Iron Condor	$0.	$0.	$0.
Total Dollar Risk	$7,239.	$4,352.	$0.
Max Risk Allowed	$20,000.	N/A	$2,500.

Note: no new Spreads this week.

Options Buying Power:

Unallocated dollars available to open new Vertical Credit Spreads:

Current Cash Balance	$20,446
Set-Aside Dollars for Existing Spreads	$12,000
Cash Available for New Spreads	$8,46 (Options Buying Power)

Vertical Spreads Opened This Month

(01/30/2023 – 02/24/2023)

No Vertical Spreads were opened in week #8. The 20-day and 7-day trajectories for all ETFs were strongly bearish, the Put/Call Ratio for all was above 1, and the IV% was rising. Following the advice of Kenny Rogers, I decided not to play this week.

DIA:315p/305p/X1 – Open 02/13/22 – Expires 03/31/23 – Max Gain = $74.00 – Open Price = 341.23
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 84.4%, Headroom= 7.7%, Max Loss= $926, AROR= 62.6%

Check (✔) rule passed.

	Unfriendly Spread	Risky Spread ✔	Friendly Spread
DEFCON	1 or 2	3 ✔	4 or 5
Underlying’s Put/Call Ratio	> 1	< 1.0 ✔	< 0.75
Underlying’s IV%	> 50%	25% – 50%	< 25% ✔
VIX	>25%	18% – 25% ✔	< 18%
Cur Val	below 9-Day SMA		above 9-Day SMA ✔
9-Day SMA	below 50-Day SMA		above 50-Day SMA ✔
50-Day SMA	below 200-Day SMA		above 200-Day SMA ✔
20-Day Regression Line	bearish	flat (± 1∘)	bullish ✔
60-Day Trend Channel	bearish		bullish ✔
14-Day RSI	above 60	between 40-60 ✔	below 40
Strike Width	20+	10 – 20	5 – 10 ✔
Short Strike Prob OTM	> 100%	> 90%	75% – 85% ✔
# Spreads per Week	0	1 – 2 ✔	2 or more

This is the first “Friendly” Vertical Spread of the year.

• The Put/Call is below 1 (0.89).
• All technical indicators are positive.
• The Feds’ meeting is not until late in this spread’s life.
• The 14-Day RSI is below 60 and rising – there seems to b e plenty of upward space.

DIA:300p/280p/X1 – Open 02/08/22 – Expires 03/31/23 – Max Gain = $58.00 – Open Price = 340.19
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 91.4%, Headroom= 11.9%, Max Loss= $1,943, AROR= 20.6%

Check (✔) rule passed.

	Unfriendly Spread	Risky Spread ✔	Friendly Spread
DEFCON	1 or 2	3 ✔	4 or 5
Underlying’s Put/Call Ratio	> 1 ✔	< 1.0	< 0.75
Underlying’s IV%	> 50%	25% – 50%	< 25% ✔
VIX	>25%	18% – 25% ✔	< 18%
Cur Val	below 9-Day SMA		above 9-Day SMA ✔
9-Day SMA	below 50-Day SMA		above 50-Day SMA ✔
50-Day SMA	below 200-Day SMA		above 200-Day SMA ✔
20-Day Regression Line	bearish	flat (± 1∘)	bullish ✔
60-Day Trend Channel	bearish ✔		bullish
7-Day RSI	above 60 ✔	between 40-60 ✔	below 40
Strike Width	20+	10 – 20 ✔	5 – 10
Short Strike Prob OTM	> 100%	> 90% ✔	75% – 85%
# Spreads per Week	0	1 – 2 ✔	2 or more

QQQ:260p/245p/X1 – Open 02/03/22 – Expires 03/03/23 – Max Gain = $17.00 – Open Price = 310.61
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 96.9%, Headroom= 16.3%, Max Loss= $1,483, AROR= 14.1%

Check (✔) rule passed.

	Unfriendly Spread	Risky Spread ✔	Friendly Spread
DEFCON	1 or 2	3 ✔	4 or 5
Underlying’s Put/Call Ratio	> 1 ✔	< 1.0	< 0.75
Underlying’s IV%	> 50%	25% – 50%	< 25% ✔
VIX	>25%	18% – 25% ✔	< 18%
Cur Val	below 9-Day SMA		above 9-Day SMA ✔
9-Day SMA	below 50-Day SMA		above 50-Day SMA ✔
50-Day SMA	below 200-Day SMA ✔		above 200-Day SMA
20-Day Regression Line	bearish	flat (± 1∘)	bullish ✔
60-Day Trend Channel	bearish ✔		bullish
7-Day RSI	above 60 ✔	between 40-60	below 40
Strike Width	20+	10 – 20 ✔	5 – 10
Short Strike Prob OTM	> 100%	> 90% ✔	75% – 85%
# Spreads per Week	0	1 – 2 ✔	2 or more

This is a rolled position (from 235p/200p) (Transaction # 10). QQQ has been moving aggressively bullish for the past 3 weeks, plus this new rolled position has a better Prob-OTM and headroom over the original with the same risk/expiration date.

The original Spread yielded me $45 in premiums but cost me $4.00 to close early. This rolled Spread gave me $17.00. So, for the same risk and same time, instead of making $45.00, I made ($45 – $4 + $17) = $62.00 (minus $2 for fees).

DIA:305p/290p/X1 – Open 01/31/22 – Expires 03/17/23 – Max Gain = $51.00 – Open Price = 338.87
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 90.6%, Headroom= 10.0%, Max Loss= $1,449, AROR= 28.0%

Check (✔) rule passed.

	Unfriendly Spread	Risky Spread ✔	Friendly Spread
DEFCON	1 or 2	3 ✔	4 or 5
Underlying’s Put/Call Ratio	> 1 ✔	< 1.0	< 0.75
Underlying’s IV%	> 50%	25% – 50%	< 25% ✔
VIX	>25%	18% – 25% ✔	< 18%
Cur Val	below 9-Day SMA		above 9-Day SMA ✔
9-Day SMA	below 50-Day SMA		above 50-Day SMA ✔
50-Day SMA	below 200-Day SMA		above 200-Day SMA ✔
20-Day Regression Line	bearish ✔	flat (± 1∘)	bullish
60-Day Trend Channel	bearish		bullish ✔
7-Day RSI	above 60	between 40-60 ✔	below 40
Strike Width	20+	10 – 20 ✔	5 – 10
Short Strike Prob OTM	> 100%	> 90% ✔	75% – 85%
# Spreads per Week	0	1 – 2 ✔	2 or more

• Put/Call Ratio is above 1 at 1.0
• 7-Day RSI is 54.7 with room to grow.
• Most all matrices are in the “Friendly” column, but for the Put/Call Ratio and the 20-Day trajectory, I see this as “Risky.”
• 15 Strike-Wide because the VIX is below 20, thus I plan to open another later this week.

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Vertical Spreads Currently Cooking

(As of 02/24/2023)

SPY:350p/335p/X1 – Open 01/26/22 – Expires 03/17/23 – Max Gain = $45.00 – Open Price = 402.01
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 92.4%, Headroom= 13.0%, Max Loss= $1,455, AROR= 22.1%

DIA:300p/285p/X1 – Open 01/24/22 – Expires 03/17/23 – Max Gain = $54.00 – Open Price = 336.24
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 90.8%, Headroom= 10.8%, Max Loss= $1,446, AROR= 25.7%

SPY:360p/345p/X1 – Open 01/18/22 – Expires 03/03/23 – Max Gain = $59.00 – Open Price = 399.85
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 90.5%, Headroom= 10.0%, Max Loss= $1,441, AROR= 33.4%

DIA:310p/295p/X1 – Open 01/18/22 – Expires 03/03/23 – Max Gain = $52.00 – Open Price = 340.10
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 90.4%, Headroom= 8.8%, Max Loss= $1,448, AROR=29.2%

Vertical Spreads Closed This Month

(As of 02/24/2023)

QQQ:235p/220p/X1 – Open 01/13/22 – Expires 03/03/23 – Max Gain = $45.00 – Open Price = 277.98
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM= 93.0%, Headroom= 15.5%, Max Loss= $1,455, AROR=22.5%
At Close: Prob. OTM=99.0%, Headroom= 24.4%

Income to open: $0.45 premium collected * 100 shares * 1 contracts = $45.00
Cost to close: $0.04 premium paid * 100 shares * 1 contracts = $4.00 (closed 28 days early)
Net Profit = $45.00 to open – $4.00 to close – $2.00 fees = $39.00
AROR = ($39.00 / 21 days in play) * 365 / $1,455 = 46.0%

I rolled this position to 260p/245p (same expiration date). This transaction represents a 46% return on my risk over the 22.5% I was expecting.

Conclusion

Can selling options for income be considered a Home Business? Can I make money at home by selling Vertical Bull Put Credit Options Spreads? These are questions that I am trying to answer for myself.

My Options Trading activities include cover calls, cash-secure puts, Vertical Spreads, and other options strategies. Cover calls and cash puts assume that I already have a sizable portfolio and accumulated cash to generate a meaningful income. But short-term Vertical Spreads do not require a substantial cash investment to make some fun money. – This blog’s sole focus is short-term Vertical Spreads.

This blog is my Options Trading Journal. I will record my weekly Option Contracts buys and sells in hopes of gaining experience.

Experience is the ability to recognize that
I’m about to make the same mistake again.

-Damocles

Disclaimer

Even though I have tried to make it clear that this blog is my personal trading journal, it has been suggested by others that I, nevertheless, include a general disclaimer. So here goes…

“This blog and the information contained herein is not intended to be a source of advice or analysis concerning the material presented. The information and/or documents contained in the blog do not constitute investment advice.”