Tuesday, October 6, 2009

Quick Clarification on my Position; October 5, 2009

I just wanted to clarify where I stand overall. I was 100% short with options expiring over a year out. Those who trade options know quite well that time is your biggest enemy when you own options. With today's bullish stock market action and the EUR/USD finding support and rallying solidly and not declining impulsively before, I want to protect myself from some of that options time value erosion if the stock market rallies to new highs again before forming a top. To do that, I sold about 5% of my put options and bought call options on the SPY for November expiration. It allows me to buy more contracts and will profit nicely if the market rallies which will negate some of that money I'll lose on my long dated options. It's just a mild protection strategy.

So I"m not bullish overall, not all. I am merely protecting some of the time and price value of my long dated short option positions.

On a side note: the GBP/JPY broke out of that 4th wave I illustrated below at the previous post and completed another 5 waves down which is bearish for risk and the stock market. However, the EUR/USD broke above previous resistance at the 1.4680 level which is bullish. So there are conflicting signals here.

Bottom line: with today's strong bullish action I chose to protect my positions a little in case the market charges to a new high. If the market is not going to a new high, then it needs to decline hard first thing in the morning and reverse the bullishness it left today.


Gustavo said...

This is the other bell, in the opinions about the economy.

The "Real" Economy Is Dying: Q4 "Going to Be a Bloodbath," Whalen Says
Posted Oct 05, 2009 01:49pm EDT by Aaron Task in Investing, Recession, Banking
Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One.

But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market's robust rally.

"Why is liquidity going into the financial sector? It's because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they're liquid at the moment," Whalen says. "That's not a good sign."

The banking sector's assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. "The real economy is shrinking because of a lack of credit."

The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn't yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.)

"Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath," says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows.

"When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring," Whalen says.

In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George Soros and Meredith Whitney, among other "prophets of the apocalypse" who've once again been raising red flags in recent days.

Todd S said...

Great article, Gustavo! Thanks for sharing this. I definitely listen to Roubini and Whitney when they speak. They know their stuff, just like Robert Prechter knows EWP. We know a wave 3 or C will crash the market, the hard part is determining "when?". This helps us with that question.

Thanks again,