Rising on light volume, but overhead dead ahead.


Rangebound fakeouts, with bullish bias.

I have been pretty busy in this anticipated slow week of trading. I woke up early on Sunday morning and decided to create a new logo for my website.
I have also been working hard to expand MySnowPro.com by offering it to professional instructors worldwide. That is now a reality. I have put together a number partners, and we are in the midst of a site redesign front and back. It should be ready by Friday.
I say that to say, while trading is my livelihood, I haven’t exactly been in sync with this market. On the way down, I successfully shorted the into the downtrend lines with nice success. I was building neutral to short positions, of which the majority was Theta positive.
Here is a some music to read by:

I am getting ready to head into the office to trade the London FX sessions, and the US equity market openings. Although, I will be trading from my home office for the bulk of the Equity session. I was reviewing my scanners for directional trades yesterday afternoon. (209 bullish bias trades vs 109 moderately bearish trades). This keeps reluctantly leaning me into the bull camp.
I am starting to build my August Calendar spread inventory. Early last week I was building my July and Aug credit spread inventory. The substantial drop in the IV with time decay has treated me well so far. I bought a few AAPL Aug/Sept 145c and 140p on a downdraft with intraday option volatility.
Fundamentally, this market remains a bit of a head scratcher. The bullish case revolves around many investors (retail and institutional) being under-invested and looking for a big surge in jobless claims to market a bottom. Last week’s bullish equity data point… Savings Rate increased to record levels (bullish or bearish depending on spin) and personal income rose by 1.x%… However, what wasn’t brought out was that included the Government stimulus check (income). If you took it away, we were actually negative. Another nice bit of book cooking… However, we rose on that information. BULLTARDS…
Doug Kass put together a list of what makes this different than recent recessions. I thought it to be very accurate.

The surfeit of consumption and the overindulgence in the credit and debt markets, however, are residues that argue in favor of a long-lived transformation in consumer behavior, much like our parents and grandparents endured after The Great Depression.
This time it is truly different:

  • Most notably, the personal savings rate will remain elevated, and personal consumption expenditures will be deflated for an extended period of problem.
  • For the first time in over 50 years, wage deflation is spreading, which will further inhibit retail spending as individuals continue to unwind balance sheet leverage.
  • Business fixed investment will be constrained in an environment of low capacity utilization rates.
  • Corporate pricing power will be limited, and a mean regression of profit margins will follow in the years ahead.
  • The construction industry (residential and nonresidential), which provided as much as 40% of the job growth in the early 2000s, will not provide the historic role in expansion of employment, and there is little to replace real estate as a catalyst to growth.
  • The securitization market, which was the straw that fueled growth over the last decade, will be limited in its capacity and ongoing role as an engine to growth.
  • Besides the consumer, the banking industry will adopt a more conservative approach to lending as the pendulum of credit moves in the opposite direction of 2000-2006.
  • An intrusive public sector means more pervasive (and more costly) regulatory burdens.
  • Corporate and individual tax rates will rise and provide a further headwind to growth.
  • Despite substandard economic growth, costs may remain elevated (especially of a materials kind), reflecting population growth and the emergence and growth of the middle class in emerging markets.

That is not to say the equity markets around the world can’t rally; they can, and over time, they will. As well, the domestic economy will, in the fullness of time, rebound, but the above traditional and nontraditional headwinds do not favor an expansion in P/E multiples.

The S&P is at the top of a (Head and shoulder) range here. (924.5 on the ES/93.22 on the SPY). I would expect a pullback from this level on tuesday/wednesday, after a strong move from 884 just 5 days ago. A few technical points worth mentioning.
Bullish – support off the Bullish Cross (50/200 dma), bounce from 23.6% retrace, EW pattern with Osc confirmation.
Bearish – Potential H/S pattern, overhead resistance in previous consolidation area (93-96 SPY).
SPY 6.29.09.gif
My play, have a short bias into the 93.22 level, cover some @ uptrend line, and add some long exposure positive theta. I put on a few IWM 50p calendar positions into yesterday’s close. With Volatility getting cheaper, I wanted to buy some vol, and start establishing a some long Vega plays.
I have been adding some UNG into this pullback. I have been selling Aug 14/12p spreads at a variety of levels. I plan on adding more at different levels as long as we don’t break the uptrend. A few reasons…
There is some decent juice in the Aug and Oct options, and I think there may be a bid as we move into hurricane season. The Nat Gas to Crude spread continues to widen. Technically, I like the base and consolidation we have been seeing.
The Nat Gas vs Oil Spread also infers a few things to me.
1) Nat Gas is the true barometer of how the economy is doing
2) Oil is becoming a dollar devaluation play (world reserve currency (until it crashes)
3) Oil pricing is a reflection of geopolitical risks
4) China is expanding their SPRs (bullish oil, no effect on Natty)
The US treasury market is finding a reflexive rebound. Last week’s successful 2,5, and 7yr auctions put a bit of confidence back in the US treasury market, however I think there should be a shorting opportunity coming soon.
ZN 6.29.09.gif
I will using some of these level in my futures trading. However optionwise, I will be looking to sell put spreads in the TBT. No reason to jump the gun and catch a falling knife here, but I am looking for a few entries.
We shall see what the next few days bring. Get ready for a great Independence day. And remember… everywhere else in the world it is 4th of July, but only in the USA is it Independence Day.

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