Tuesday, May 5, 2009

S&P Surges Past 900

The S&P surged yesterday nearly 30 points possibly marking a top in the market's current move. Not sure about this but there was certainly panic buying in the market. The bands in the chart are not the usual -2/+2 bands, but -3/+3. According to my study, the S&P's price standard deviation yesterday reached +2.57, definitely IRRATIONAL.

I have yet to become a believer in the market and actually was selling some stocks in my personal account. I am still waiting for a retest of the low. It may not come but I still find it hard to believe that the economy is truly recovering. Seems as if it's all been done with smoke and mirrors. I prefer to focus on trading the 10 year futures. the interest rate futures seem to me more transparent.

Interest rates again tried to bring levels below 3.15 and succeeded but not by much. Volatility continues to shrink which is great for option sellers. I do expect option premiums to expand some tomorrow as we near the much awaited Stress Test Results. Seems though that the "leaks" of this news has been adequately MANAGED and the bond market has been relatively tame. Don't think any news from this front will result in interest rate Shock and Awe.

Unemployment news follows on Friday. Will there be any surprise here? Think that we are all immune to new unemployment numbers in the 600,000. Think that it will take a number exceeding 700,000 to scare the market, or some unemployment rate well beyond 8%. Otherwise, this news may also be an nonevent and interest rates will continue to languish.

An analyst on tv this morning mentioned that perhaps the Fed is managing interest rates to gradually creep up. Again, note the term MANAGED. Well, this also remains great news for options sellers. Believe me, there is nothing worse for an option seller than for Bernanke to open his mouth, causing interest rate futures to soar five points in a heartbeat.

We will be keeping our eye on volatility levels but for now, it seems to make sense to continue selling option premiums with a bias towards higher rates. Can't forget however that there is a significant long term down trend line that still must be respected.

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