No Man's Land

Last night I said that it felt like the bears were still fighting the rally tooth and nail. My suspicion was confirmed when I saw that Rydex traders actually became slightly more bearish yesterday. The 10 Day moving average of the CBOE put/call ratio is also on the high side. We have now rallied over 30 S&P points and traders have become more bearish.  That is highly unusual and has bullish implications. With that backdrop it is hard to imagine much downside.

The bad news is that after today the market will be overbought.The bulls were not able to do much with the market deeply oversold so overbought could be a problem. Given this confluence of factors I believe it is hard to imagine a sustained, outsized move in either direction. However, if we did get another move lower next week into expiration the market would be oversold and sentiment would likely be at an extreme. That would set us up for a nice rally.

The mixed backdrop I described leads me to believe that being short puts is a valid strategy. It allows for another move lower but will also make money if the market continues to chop around or go higher. That said, I will likely reduce my longs today because we are losing the oversold reading. I am short some March puts that have lost most of their value. There is no need to keep that paper hanging around so it can bight me in the ass next week. I will look to increase longs next week if we do go lower.

3 comments:

nicasurfer said...

Very nice strategy

Tsachy Mishal said...

thanks

Chaos! said...

Looking at the Rydex chart, we reached lower levels in prior (smaller) pullbacks. My take is that there's a fair chance we need an ugly end to this correction to put a meaningful medium term bottom in.
Having churned for over a week with little upside progress makes me still a seller of lifts with an eye toward a washout in the next few days.