The following is a reprint of the market commentary from the May edition of The Option Advisor, published on April 25. Prices and the charts are as of the close on April 25. For more information or to subscribe to The Option Advisor, click here.

Many technical analysts maintain that "It's all in the charts," and while this is generally a bit of an exaggeration, I have attempted in the accompanying 3 charts to come as close as possible to making it so. These charts track the weekly price action over the past 2 years in the SPDR Gold Shares ETF (GLD), the S&P 500 Index (SPX), and the iShares Barclays 20+ year Treasury Bond ETF (TLT).

You will note from the various chart headings that I am characterizing the market condition for the GLD as "bearish," while evaluating the S&P to be "bullish," and TLT as "neutral." And in the body of each chart, I list in bullet point form the basis of my assessment of these markets, along with various "key levels" -- above and below current prices -- I feel are worthy of your attention. As a trader, I believe more than ever that constructing the key levels for any instrument in which you have a position (or are considering one) is absolutely essential -- for establishing solid entry points, as well as for avoiding the tricks our emotions can play on us that can present major obstacles to exiting positions at optimal levels. And, in many cases, identifying the right levels can help us identify whether bull or bear market conditions are in effect.

One factor that is never "in the charts" is the extent investors are committed -- both financially and emotionally -- to a particular market. And an accurate gauge of investor sentiment can provide you with strong clues on whether the most pristine bull market as depicted on the charts will have sufficient buying power from which to draw in order to be sustainable. A classic case has been the recent implosion in the price of gold. I characterized GLD back on Feb. 1 as having "the clearest bull market chart" (as compared to stocks and bonds), but the huge degree to which gold market participants (from individual investors to hedge funds) were already committed to rising gold prices rendered GLD very vulnerable to a sharp correction. And the "true believer" nature of this bullish gold commitment is on display even in the wake of the devastating decline, as many gold advocates cite market manipulation as the culprit.

(Note: All charts below courtesy of Trade Monster -- click to enlarge. The 40-, 80-, 160, and 320-week moving averages are included in white, green, red, and yellow, respectively.)

And speaking of gold advocates, is there even such a thing these days as "stock market advocates," despite the recent run by the S&P to all-time highs? While this is overly simplistic as a sentiment gauge, it is a fact that the disbelief with which gains in the equity market are greeted, and the ongoing extreme focus on instruments of "portfolio protection," are a strong indication that there is much in the way of sideline money that can flow into equities before a market top is in place.

Finally, there is the bond market, which from the action in the TLT chart appeared to be moving out of bull market and into bear market status (and whose bull market I had graded "C" back on Feb. 1). The recent TLT rally has, by my reckoning, now rendered the overall picture "neutral", and I would carefully track the key levels on the accompanying chart for further clues.

The following is a reprint of the market commentary from the April edition of The Option Advisor, published on March 21. Prices and the chart are as of the close on March 21. For more information or to subscribe to The Option Advisor, click here.

If you've been heeding the widely disseminated advice over the past decade to invest only in "quality, large-cap, blue chip stocks" -- often reluctantly offered by equity bears at heart who are nevertheless paid to produce actionable ideas for stock market investors -- you've generally suffered the investing equivalent of being pecked to death by ducks in the short-term while at the same time bleeding out lost opportunity over the long-term. Witness the cumulative gains (excluding dividends) below for the S&P 500 Index (using the SPDR S&P 500 ETF (SPY) as a proxy) and the Russell 2000 Index (with a proxy of the iShares Russell 2000 Index ETF (IWM)).

And blue chip investors also endured a period of 20 consecutive trading days earlier this year during which the Dow Industrials meandered just above (and just below) the 14,000 level before a victory of sorts was declared over this hurdle. And they are currently bearing witness (as displayed in the accompanying 10-minute intraday chart of the S&P) to "8 trading days and counting" during which the S&P has random walked around the 1,550 level while failing at any point to trade above 1,569 (which would represent a 10% year-to-date gain).

There is an alternative to enduring the tortuous ways of the large-cap space, beyond the simple, but effective advice offered in this space time and again over the years to focus away from the blue chip indices and instead concentrate in the small and mid-caps. Because such an approach can yield some spectacular results if applied beyond the market index world to industry sectors and to individual equities.

For example, I was shocked by the weak returns so far this year in the large-cap REITs that dominate capitalization sensitive ETFs like the iShares Dow Jones US Real Estate ETF (IYR), and I proceeded to divide the REIT space into companies with market capitalization of $10 billion or more and those with less than $10 billion (but more than $2 billion) in market cap. The eye opening results are summarized in the table below:

You may not have any interest in REITs, but perhaps as an options or futures trader you are excited by companies like CBOE Holdings (CBOE) in the options world and CME Group (CME) in futures. These are each great companies, and CME definitely has the edge in size (a $20 billion market cap, compared to just under $5 billion for CBOE). But CBOE has posted a 24% gain over the past year, compared to 3% for CME. Might this relative performance have been coincidental? After all, the CME has posted a 600% gain since its IPO in 2002. Perhaps, but my sense is the opportunities for growth (and thus for price appreciation) are greater for the small and mid-cap companies, plus they are not as subject to the entropy that can engulf the large-cap world (take another look at the accompanying S&P chart). And in all fairness, note that back in late-2002, CME's market cap was on the order of about $3 billion.

Perhaps you are enamored of internet content providers. If so, you may have purchased Yahoo! Inc (NASDAQ:YHOO) shares a year ago and after a few months of stagnation enjoyed the ride as the shares began to respond to the initiatives of new CEO Marissa Mayer and have gone on to appreciate by about 48%. But if you had instead purchased shares in AOL, Inc. (NYSE:AOL) with a market cap of less than 10% that of YHOO, your one-year gain would have been an even healthier 102%.

And finally, here is the one-year share performance for a trio of companies arguably in similar businesses (though I can see some aficionados of each company strongly disagreeing). In any event, check out the market caps and the relative stock price performance.

Are my examples of smaller vs. larger cap stock performance too facile? Or perhaps this just represented a unique period in the market? Maybe, though I don't believe this to be the case. In fact, I continue to admonish that the large caps, which have proven themselves to be far from immune to the ravages of the various crisis-led market plunges over the past decade or so, simply do not pay you enough in potential upside to be worth the risk.

The following is a reprint of the market commentary from the March edition of the Option Advisor, published on Feb. 21. Prices and the chart are as of the close on Feb. 21. For more information or to subscribe to the Option Advisor, click here.

"Throughout all my years of investing I've found that the big money was never made in the buying or the selling. The big money was made in the waiting."
Jesse Livermore (1877-1940), renowned early-20th century stock trader

With what has seemed like an epic and thus far futile struggle this year to surmount the 14,000 level on the Dow Jones Industrial Average, our Senior Quantitative Analyst Rocky White prepared for the 2/2/13 edition of our weekly Monday Morning Outlook a very interesting study of the market's behavior when in proximity to round-number levels on the Dow. Specifically, he went back to 1999 (when the Dow first crossed 10,000) and determined the Dow's performance during periods following its contact with the 10,000, 11,000, 12,000 and 13,000 levels, compared to its "any time" performance.

And Rocky's conclusion? "As it turns out, the Dow really struggles at these levels ... The typical one-year return for the Dow since 1999 is 3.04%. But when it crosses one of these even levels, it averages a loss of 4.05%, showing a positive return just 36% of the time."

The surprise here from my perspective related only to the duration of the impact of the interactions with these 1,000-point increment levels (longer than I would have expected), as I have discussed here on many occasions how and why such "super round number" levels can first act as magnets and then as brick walls of resistance. And that this phenomenon applies to individual equities as well as to broad market indices (and to commodities and even to levels of interest rates).

But let's consider the following before we conclude too hastily we are unlikely to see Dow 15,000 before, say, some time next year. The period 1999 to date encompassed by Rocky's study was very much characterized by sideways market action punctuated by gradual rallies and occasional very sharp declines (see accompanying long-term chart of the Dow from July, 1980 to date). Though 14 years seems to be a long time for the market to be voting "undecided," I'll note that the Dow first reached the 1,000 mark in the early-1960s and then failed at this round-number level on numerous occasions over the ensuing 20 years.

But it is what happened between these two lengthy periods of market stagnation that will remind those who are veteran investors, and perhaps amaze those who have first become exposed to the stock market over the past decade or so. So let's focus on the period prior to the vertical line drawn on the accompanying chart, and note that over the 18 years from August 1982 through January 2000, the Dow rallied from a low of 770 to a peak of 11,750. Put another way, the market peaked in January 2000 at more than 15 times its low in August 1982, as measured by the Dow Jones Industrial Average. This is how fortunes are made in the stock market (something no one needed to teach Jesse Livermore).

I'm not necessarily suggesting that 14,000 will be the "See you later" level for the market this time on its way to a mind boggling peak of "15 X 14,000." But I do think we need to allow for the possibility we could be -- whether this year or next year or the year after -- transitioning from a period of market stagnation to a period during which the market soars far beyond conventional expectations.

I'll leave you with the following potential bullish parallel to ponder. The famous (for its horrible timing) Business Week "Death of Equities" cover from 1979 was published in roughly year 17 of the 20-year period during which the Dow was capped at 1,000, and thus three years prior to the beginning of the greatest bull market in U.S. stock market history. TIME magazine's "Why It's Time to Retire the 401(k)" cover story -- which I consider to be as extreme as "The Death of Equities" in its strident advocacy of the hopelessness of equity investing -- was published in October 2009.

The following is a reprint of the market commentary from the February edition of the Option Advisor, published on Jan. 24. Prices and the chart are as of the close on Jan. 24. For more information or to subscribe to the Option Advisor, click here.

"You can't always get what you want
But if you try sometimes, you just might find
You get what you need"
"You Can't Always Get What You Want," Rolling Stones, 1969

"Come, Mister tally man, tally me banana"
"Day-O (The Banana Boat Song)," as performed in Geffen Film's "Beetlejuice," 1988

One of the trickier aspects of options trading is deciding if the forecast for future volatility embedded in the option premium you are purchasing (the so-called "implied volatility") is reasonable. If the volatility over the course of the holding period for your option proves to be lower than implied volatility, it can be said in retrospect that the premium you paid was "rich." And the opposite can be said about your purchase price, if this future volatility proves to be greater than expected. But is this really where the key to your success as an options trader resides?

To address this question, let's assume the volatility over the period you own an at-the-money call proves to be twice that which was anticipated in the premium you paid. So how much money will you make? (Note: trick question)

The answer boils down to the following: You have a 50% chance of losing your entire premium at expiration on any at-the-money option you buy if you get the direction wrong, regardless of your cost and regardless of the level of stock volatility over the holding period. Okay, you say, let's assume I get the direction right and buy a call and the stock finishes higher than my strike at expiration. And to this I would say: The expected value of your call at expiration in this instance is twice the premium you paid, due to the fact that share volatility was double what had been expected. But this still does not guarantee you a profit at expiration – the stock must finish above the level of the strike price plus the premium (albeit cheap premium) you paid.

In other words, the expected value of your at-the-money call reflects a weighted average of all the possible prices at which the stock may be trading on expiration day, based on long-standing statistical methods. So even if you "know" the future volatility for your stock, all you really know is a range of possible prices for your at-the-money option at expiration. Such knowledge gives you no information at all about the direction or the magnitude of this future price movement. And no matter how high this future volatility, you as an at-the-money call buyer still stand a 50-50 chance of experiencing a 100% loss by being wrong on the direction.

The bottom line is when you buy call or put options in order to leverage your price forecast for a stock over a defined time period, the "unit of currency" for your purchase price is volatility, but your payoff is in an entirely different currency – the extent of the price movement in your forecast direction. You may think you want high volatility, but what you really need is big movement in your forecast direction - the only "tally" of importance for winning this game.

But there is even more to this dichotomy between paying for volatility but ultimately getting paid in directional movement, as very often your volatility-based cost will be at its lowest when your desired directional movement is at its greatest. And an excellent illustration of this "best of all worlds for option buyers" is found in the accompanying daily price chart of Visa (NYSE:V) (along with its 14-day historical volatility (HV)), since post-IPO trading began on March 28, 2008.

After an initial rally to about $90 from the mid-60s, Visa shares declined sharply over the next six months to the $40 area, whereupon a rally over the next year or so terminated just shy of the $100 mark. It was not until late 2011 that Visa mounted another serious assault on $100, and by February 2012 the $100 level was firmly in the rear-view mirror (the shares reached an all-time high at $162.77 earlier this month). But whither the volatility of Visa shares over this one-year period of very powerful upside price action? Taking a look at the lower panel of the chart that displays 14-day historical volatility (HV) -- and ignoring the unusual volatility associated with periods around earnings reports -- we note that 14-day HV peaked at 36% at the beginning of December 2011 when the shares were first mounting their attack on the $100 level. But by the time Visa had rallied by about 20% to $119 in March 2012, 14-day HV was more than cut in half to 15%. And by September 2012 with the shares at $128, 14-day HV reached a nadir just shy of 10% and then proceeded to bottom at 8% with Visa at $148 in December. At Visa's close of $159.56 today, its 14-day HV finished at 10.47%, which leaves us with the following tally: Visa shares +59% (since December 2011) and Visa's 14-day historical volatility -70% from 36% to 10.47%. (While implied volatility (IV) for Visa options did not decline to this same extent over this period -- IV dropped from 30% to just below 20% -- the cost to purchase Visa options was still dramatically reduced.)

So can you as an options trader have the "cake" of strong price action and eat it, too -- by paying progressively lower call option premiums? You bet -- just make sure your bets are bullish over such periods!

The three major asset classes of equities, bonds, and gold have all enjoyed solid uptrends in recent years -- but not every bull market is created equal. In the latest installment of Bernie Schaeffer on Charts, I analyze the five-year returns for the SPDR S&P 500 Trust (SPY), iShares Barclays 20-Year Treasury Bond ETF (TLT), and SPDR Gold Trust (GLD). To find out which asset class scored the highest -- and which chart is stretching the "bull market" definition -- click over to "Grading Stocks, Bonds, and Gold."