Tuesday, March 19, 2013

No Sub 1500 for a While

I heard about a really big SPX 1550 June options straddle position being placed late last week.  This brings me to a view which is very different from the person who put on that position.  I believe he will lose most of his money on that trade.

I am going to go out on a limb here.  We will not go below 1500 for the next 3 months of ES trading.  Yes, 3 months.  Through any possible Cyprus contagion (joke), Q1 earnings, through the "Sell in May and go away", through the debt ceiling deadline, and through any potential black swans.  Things can change, but unless something dramatic happens, I am sticking to this view.  I expect volatility to remain subdued, staying below 15 for most of the time.

The reason I am confident about this is because I don't see us making a triple top of 2000, 2007, 2013.  And if we aren't making a top, then we won't have much volatility as we consolidate near the highs.  That being said, I also don't expect a continuation of this uptrend like we have seen since the start of the year.  The enthusiasm and retail fund flows are just not going to come in to provide the fuel for the next leg higher.  This rally is being driven by a reduction of equity supply from corporate stock buybacks, M&A, and LBOs, not by an increase in investor demand.  Thus, the market will be strongly supported by the aforementioned activities, as well as dip buyers.

The next 3 months will be a good time to sell volatility and put options.  But I would not be a buyer of call options, because I don't expect us to gain much ground during this time period.  The all time highs will be massive resistance. 

Now back to your regularly scheduled Bore market. 

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