People are starting to get the idea that the markets will never correct, and they couldn’t be more wrong. Bulls may think that the action today was positive, but it was not for several reasons.
| Symbol | Contract | Month | Time | Last | Change | Open | High | Low |
|---|---|---|---|---|---|---|---|---|
| VX J3-CF | S&P 500 VOLATILITY | April2013 | 16:04:56 | 14.30 | 0.05 | 14.70 | 15.35 | 14.30 |
| VX K3-CF | S&P 500 VOLATILITY | May2013 | 16:04:56 | 15.45 | -0.10 | 15.85 | 16.35 | 15.40 |
| VX M3-CF | S&P 500 VOLATILITY | June2013 | 16:04:45 | 16.38 | -0.12 | 16.70 | 17.20 | 16.33 |
The futures didn’t even waver, realistically. This gives proactive investors/traders a massive advantage, as they can load up on cheap puts on indexes and stocks for the inevitable dip. I am not saying trend change, I am not saying downturn, I am not saying bear market. I am saying that there will be market weakness this year and it will catch people by surprise. That’s all.
Let’s do a quick pro versus con with the market right now:
Pros:
-Fed QE (this is heavily misunderstood and not as great as people believe, but let’s leave that discussion for another time. In general it is a market psychological positive)
-Housing Recovery-No way to really spin this negatively
That is all I’ve got in the near term for pros.
Cons:
-Stock market near all-time high and valuations are at the least fairly valued if not too high
-Earnings near all-time high relative to GDP
-Euro and Asia drags worsening
-Seasonal strength of the market ending (there is a ton to this, and we will take this topic up next week)
-Economic data worsening- the last week’s data is showing slower growth
-Sequester and tax effects only now hitting retail customers- tax returns are now almost spent and government tax increases and spending cutbacks begin
What major areas have I missed?
So today, folks want to claim that the sell-off was met with some buying. Ok, I guess if you are going to have a down day, it was a good down day. But the bulls are clearly playing defense now, to many of the cons listed above. If they have to start every day with negative data points and world markets in correction, it will be a tough road higher.
In the meantime, let’s say you are bearish on the market right here. Look at the prices of these puts:
| 140.00 | DIA130628P00140000 | 1.98 |  Â 0.01 |
1.89 | 1.98 | 10 | 1,145 |
| 141.00 | DIA130622P00141000 | 2.20 | Â 0.20 |
1.97 | 2.05 | 127 | 1,815 |
| 141.00 | DIA130628P00141000 | 2.70 | Â 0.77 |
2.14 | 2.23 | 12 | 104 |
| 142.00 | DIA130622P00142000 | 2.33 | Â 0.14 |
2.25 | 2.33 | 40 | 891 |
| 142.00 | DIA130628P00142000 | 2.83 | Â 0.28 |
2.41 | 2.50 | 38 | 264 |
| 143.00 | DIA130622P00143000 | 2.75 | Â 0.19 |
2.55 | 2.64 | 34 | 1,918 |
| 143.00 | DIA130628P00143000 | 3.10 | Â 0.19 |
2.72 | 2.82 | 4 | 238 |
| 144.00 | DIA130622P00144000 | 2.95 | Â 0.07 |
2.90 | 3.00 | 173 | 776 |
| 144.00 | DIA130628P00144000 | 3.15 | 0.00 | 3.10 | 3.20 | 10 | 540 |
| 145.00 | DIA130622P00145000 | 3.30 | Â 0.20 |
3.30 | 3.45 | 61 | 537 |
| 145.00 | DIA130628P00145000 | 3.60 | Â 0.55 |
3.45 | 3.60 | 6 | 214 |
| 146.00 | DIA130622P00146000 | 4.10 | Â 0.45 |
3.75 | 3.90 | 80 | 276 |
| 146.00 | DIA130628P00146000 | 3.90 | 0.00 | 3.90 | 4.05 | 10 | 45 |
| 147.00 | DIA130622P00147000 | 5.06 | Â 0.66 |
4.30 | 4.40 | 1 | 49 |
| 147.00 | DIA130628P00147000 | 5.20 | Â 0.90 |
4.45 | 4.60 | 2 | 99 |
| 148.00 | DIA130622P00148000 | 5.32 | Â 0.32 |
4.80 | 5.00 | 2 | 76 |
| 148.00 | DIA130628P00148000 | 5.77 | 0.00 | 4.95 | 5.15 | 2 | 90 |
| 149.00 | DIA130622P00149000 | 5.58 | Â 0.05 |
5.25 | 5.70 | 18 | 23 |
| 150.00 | DIA130622P00150000 | 6.31 | 0.00 | 5.95 | 6.45 | 1 | 60 |
These are insanely cheap. The implied volatility into June is between 10 and 11!. So for almost nothing, you can buy the downside of the market right here and watch for two months to see if the Dow can push to 15k. If it falls apart, you make multiples. If it doesn’t you lose some of your premium. A 5% correction in the Dow and the ATM options here would at least double. And you get to hold them through two of the worst months in the market historically, May and June. Spreads set up nicely here as well, with the potential for multiples if you get direction and magnitude correct.
Forget about the VXX and VIX calls. If the VIX is going to be cheap, it can stay cheap when the market falls. Meanwhile, your cheap puts will rise if the VIX rises and they will rise if the market falls. In the case of VIX or VXX calls, you need both to occur, a rise in vol and a fall in the market. Why buy something where you need two factors, when you get two for one very affordable price?
Outlook/Action:
Our IWM puts are working tremendously, and we have new puts in DIA, IYT, and looking for QQQ and SPY. Closed all long VXX and VIX calls for small losses today.
I expect quiet and modestly choppy trade for the rest of the month. April is #1 for the Dow and #2 for the S&P historically. May could be another story all together. On market moves higher we will add more puts for the summer.
