Get Ready for a Bitter Pill

The freshest “surprising” news is that S&P  just downgraded the US debt’s outlook to “Negative” from stable. IMHO, the only surprising element of this story is “courage”. I don’t think till now rating agencies even raised eyebrows forget about downgrading the US debt. Just a few years ago, this was almost unimaginable! As a result of the “surprising” news, markets dropped but recovered from the severe intraday losses but still resulted into a 90% down day. It was 4th 90% down day since Feb high, and not a single 90% upday has been recorded since then, in fact last 90% update was observed on Dec 1, 2010, that’s almost 5months back.

Usually a 90% down day is followed by 2-5days of technical rebound. Let’s see how much rebound will take place in next few days. 1,344 is surely a look out area for S&P500.

Stocks markets have a lot of digest in the coming months-

  1. US debt ceiling; while there may be a lot of chatter, debates and blah blah; the limit will be raised. I don’t think there is another better and easier option available.
  2. QE3– Your guess is as good as mine. But if Uncle Sam’s spending spree is to be continued and markets needs to be supported for “wealth effect” while high unemployment continues, it’s likely that we might see QE3 coming our way. Watch out for “or else” campaigns.
  3. US Dollar– Well, does anyone really care? Just look at the USD index below. A picture is worth a thousand words. The only reason for it to appreciate is lack of a better alternative. EUR has its own issues.

Be careful with Gold/Silver. Though I am a long term bull on Gold and been vocal about Gold since 2007. I don’t know but I sense that sooner/or later we might some sort of bearish remarks on these two triggering short-term pull backs, but as long as Gold remains above $1,400 it is still marching up.

And let’s see if this reflected in market participant’s sentiments. Here is the VIX futures quotes , you will find rising premium vs VIX cash @ 16.96 (Y’day close). Current markets are pretty much on ventilator support (courtesy Fed) since 2009 and Apr/Jul last year provided a glimpse of what will happen if Fed takes away the ventilator.

So where does this leave us? If I were to share my perspective- Continue to trade options with reduced premium selling (especially for long term trading), and avoid taking long equity position; instead I will take bearish positions with an outlook for a pullback. I won’t go long unless S&P closes above 1344.

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Profitable Trading, OP






5 responses to “Get Ready for a Bitter Pill”

  1. prakashsi Avatar

    nice observation op

    also where did you get that OP Accum Distrib study for TOS?

  2. OptionPundit Avatar

    Dear prakashi,

    Thanks. It’s a simple study that you can code as well. Basically, threshold is 90% volume. Use $UVOL for up volume and $DVOL for the down volume. Just plot the proportionate ratio and you have it.

    Profitable trading, OP

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