The Outlook

I have written numerous times that I don't expect this Summer to be great for the bulls. I believe the best they could hope for is a trading range. However, that does not mean that there will not be rallies. I believe that we are setting up for such a rally at the present.

The S&P 500 is sitting 50 points lower than where it was at the close of business last Tuesday. Since then we have seen two very nasty days of breadth and extreme put activity. This typically leads to at least a bounce.

Unfortunately we are not set up for a bigger rally. If we rally through Wednesday the market will once again be overbought. Sentiment indicators have not reached extremes either. I believe there will be opportunities this Summer where sentiment indicators register extreme readings.

I am largely in cash but short puts as well. I want to clarify to readers what being short puts means about my market outlook. If sentiment were extreme and we were oversold I would be long stock. Short puts is a far less bullish posture than long stock. For instance, my largest position is that I am short the SPY 128 Puts expiring in two weeks. Essentially what I am doing is committing to going long the S&P 500 at 1270 (including premiums) in two weeks if we keep plunging. For that commitment I receive premium, which I get to keep even if we don't fall by that much. Saying that I will be willing to go long if we fall another 30 points in the short span of two weeks is not that bullish.

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