Overnight news out of Europe once again is full of lowered expectations of future growth. The Bank of England, in its quarterly inflation report cut its 2012 GDP forecast to 0%. S&P placed Greece on negative watch, noting that it may need additional funds from the Troika. S&P also lowered their expectations of Greek GDP from a 4-5% contraction to a 10-11% contraction in 2012. There was pressure on Spanish bonds overnight as Spain changed its deficit target to 4.5% from 3.5% of GDP. Spanish 10-year bonds now yield 6.44%.
In the US, the market looks to be on track for a modestly lower opening. Yesterday after the bell PriceLine and Disney reported earnings misses. We believe that the market looks toppy here and could see a short term decline. One reason is that despite the S&P 500 being up the last two days, the VIX has been up as well. Typically we see the two move opposite to each other.
A rising VIX in a rising market means that traders are buying options to protect their portfolios from a decline. This indicates that there may not be many buyers at 1400 in the S&P 500 to continue pushing the market up. We recommend using $SPY August and September put spreads to reduce the impact of a market decline on a long stock portfolio. For example, with $SPY at 140.30, you can buy the Aug. 139 put and sell the Aug. 137 put for $0.45. Should the market decline and close below 137 at August expiration the trade makes $1.55 on only $0.45 of risk.
In uncertain markets like this investors should stick to quality stocks and only take trades with the best risk/reward ratios.
In the US, the market looks to be on track for a modestly lower opening. Yesterday after the bell PriceLine and Disney reported earnings misses. We believe that the market looks toppy here and could see a short term decline. One reason is that despite the S&P 500 being up the last two days, the VIX has been up as well. Typically we see the two move opposite to each other.
A rising VIX in a rising market means that traders are buying options to protect their portfolios from a decline. This indicates that there may not be many buyers at 1400 in the S&P 500 to continue pushing the market up. We recommend using $SPY August and September put spreads to reduce the impact of a market decline on a long stock portfolio. For example, with $SPY at 140.30, you can buy the Aug. 139 put and sell the Aug. 137 put for $0.45. Should the market decline and close below 137 at August expiration the trade makes $1.55 on only $0.45 of risk.
In uncertain markets like this investors should stick to quality stocks and only take trades with the best risk/reward ratios.
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