Over the past few days the persistent rally in the stock market has yielded an all-time high in the Dow Jones futures contract, while the S&P 500 comes ever closer to reaching its all time high in 2007.
In my opinion, the market remains overextended. The support it has had and will likely continue to receive from the Fed’s ultra-easy monetary policies, including the monthly purchases of a total of $85 billion in Treasuries and mortgage backed securities, seem to possibly be providing a backbone of support against mixed economic data. I believe that investors are so bullish it may have helped cause stock short sales in February to fall to the lowest level since at least 2007.
WEARING BLINDERS
The bulls don’t seem concerned about a weakening corporate earnings outlook. Earnings for companies in the S&P 500 are expected to fall 1.7 percent in the first quarter, which would be the first decline since 2009, according to Bloomberg news.
OLD MARKET ADAGES
“Don’t fight the Fed,” “the trend is your friend”, and “grabbing defeat from the jaws of victory” are all phrases that come to mind when a market is in a bull channel and you are trying to pick a top. It is my belief that markets may focus more on percentage gains, similar to what some fund managers do when it’s time to pay themselves handsome bonuses on market performance monthly or quarterly. In an article a few weeks back, I predicted that the E-mini S&P market would sell-off when it reached the 1530 area. I suggested buying 1500 puts for a low purchase price.
For those who followed the trade, the market pulled back down to the 1490 level as I felt may happen and profits could have been made if you sold the puts when the S&P market retraced. The reasons for the pullback were potentially many, but one factor that I viewed as important focused on the sequestration debate in Washington on automatic budgetary spending cuts. Longs in the market potentially took profits over the uncertainty. In a few weeks the market faces another possible political headwind in the form of a possible government shutdown at the end of March. It is my opinion that a debate over a possible government shutdown will be taken down to the last minute, which may spook longs in the market to book profits.
Once again, I am speculating that we could see a political induced sell-off in the indices, similar to the fiscal cliff, debt ceiling, and sequestration.
TRADE IDEA
The E-mini S&P 500 basis March futures closed 2012 at 1424.50. A ten percent rally brings us up to the 1567 level. If this level is achieved, I propose the following trade. I would be looking to buy the April E- mini S&P 1510.00 put for a purchase price of 8 points, or in cash value $400.00. The risk/price on the trade is the price paid for the puts (premium) plus all commissions and fees. If we saw any significant retracement or pullback in the futures market, I would look to exit the option position at a premium price of 16 points.
