Skip to main content

Morning Update

Yesterday as the Dow broke out to new highs the biggest trade of the day went up as one trader bought 600 March 141 DIA calls for 1.06. Oh wait, that was us. As the market gained momentum yesterday we decided to added some fixed risk upside exposure for clients to take advantage of a possible breakout in the Dow. We liked what Bernanke had to say, which was basically that easy monetary policy is not going anywhere anytime fast. We don’t like to fight the Fed, and if interest rates are going to continue to stay low risk assets will continue to appreciate. As if to prove this the New York Fed stepped up yesterday and made their largest asset purchase yet this month. Yesterday the VIX crashed down nearly as fast as it had gone up just days before, which shows just how fast Bernanke was able to remove the fear in the markets. A low VIX also means that option premiums are lower, which makes buying call options more attractive.

Technically the DIA looks poised to make a run for new highs. We liked the fact that we closed at Monday’s highs, which we consider to be the breakout level. We will be watching this level, 140.60 closely to see if the breakout is confirmed. We will also be looking closely at volume today and tomorrow. Yesterday’s rally was on exceptionally low volume, which is a concern. For the rally to really gain traction volume and participation will have to increase. Another risk to the rally is bearish news flow over the sequester which is set to begin tomorrow. Because of these risks we are playing the breakout with out of the money call options to keep risk limited in case we are wrong and the market sells off.

Comments

Popular posts from this blog

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."


Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…

The market should take Trump seriously this time.

Kim Jung-Un gave the U.S. an unwelcome birthday present as he test launched an ICBM capable of reaching Alaska.  North Korea has made it very clear that their intention is to grow their nuclear capability to be able to reach the Continental United States.  This would destabilize the region, and world overnight.
Now I don’t expect the war drum beating will spill over into mortar shells raining down on Seoul anytime soon.  There has been a choreographed diplomatic dance going on for the past 40 years with North Korea that is likely to continue as follows; North Korea acts out, U.S. gets upset, U.S. sanctions them (with help from China).  North Korea gives up their acting out activity (promises they won’t do it again), a North Korean South Korean gesture of goodwill takes place, such as joint Olympic teams, joint economic projects, North Korea gets to declare victory.
However, this go around seems slightly different.  Now we have a President who has made it very clear in his campaign tha…