Comments on: Reflation trade stumbling

By: DaveT

DaveT — Thu, 02 Jul 2009 14:45:06 +0000

What an excellent little blog you have here. Low noise, high content. A rarity on the Internet.

By: Mike

Mike — Thu, 02 Jul 2009 01:23:22 +0000

LEAPS on SPY are available for December 2011. The Dec 2012s will be rolled out next winter.

By: Options Question

Options Question — Wed, 01 Jul 2009 22:18:37 +0000

“Right now, you can buy 36 months of leeway with December 2011 puts. ”

Where can you trade these? When I look at the options chain on Yahoo it shows Jan 2011 only.

By: Mike

Mike — Thu, 25 Jun 2009 21:19:25 +0000

agreed: disjointed market today. see new thread.

By: Aki_Izayoi

Aki_Izayoi — Thu, 25 Jun 2009 21:11:24 +0000

Massive decoupling today:

http://pragcap.com/market-wrap-7

Treasuries: UP (deflation)

Pound vs. dollar: down
Euro vs. dollar: up

US Equities: UP (not deflation)

gold: up
oil: up
copper: up

So, now the market isn’t moving coherently. Deflationary bias in the bond market while the commodity market was reflationary. Equities went up… but it was not surprising in hindsight. Going short at 900 for the S&P 500 didn’t have a good short term risk/reward.

By: Mike

Mike — Thu, 25 Jun 2009 04:46:55 +0000

EWI pointed out today that cumulative tick readings are looking very oversold. To me, this points to the chop scenario, or at least a more substantial bounce. In a strong rally, I’d expect new lows for the dollar, but that would be tough from these levels of bearishness, so that points to chop.

Keep in mind that chop is the late 2001 - early 2002 scenario, and that the VIX dipped under 20 then. That would make for some very cheap OTM LEAPS. Aki makes a good point above: the spread between 10% and 30% OTM puts is very high right now, another oversold reading.

By: Aki_Izayoi

Aki_Izayoi — Wed, 24 Jun 2009 23:11:32 +0000

“It is also possible that we never get a deep sell-off, but just chop around within a 50-100 point range for a few more months while fundamentals deteriorate until Pangloss just can’t justify hitting the offer anymore. Chopping around the 900s without ever breaking clean through 1000 would be nearly as exhaustive for the bulls as this rally has been for the bears. It would draw them all in until none were left and volume dried up. That would be an awesome set-up for bears who aren’t themselves worn out in the chop.”

I think that is likely… given the market now expects large downside risks.

“Downside skew, which gauges the relative cost of buying insurance against a slide in stocks, is now higher than it was when the Standard & Poor’s 500 Index dropped to a 12-year low on March 9. That indicates a “relatively high chance of downside moves,” the brokerage wrote in a report dated yesterday. …

“The sharp move higher in risky assets off the early March lows had pushed hedging to the back burner,” a team of analysts led by New York-based Sivan Mahadevan wrote. “Downside skew has risen recently, implying that the probability of large negative moves is actually somewhat higher.” …

The difference between the cost of put options to hedge against a 30 percent drop in equities and the cost of options to protect against a 10 percent decline is now at its highest since February, the brokerage said. The spread, which is one way of measuring so-called skew, is now higher than it was when the S&P 500 dropped to its lows in March.
”

http://declineandfallofwesterncivilization.blogspot.com/2009/06/downside-skew.html

I am not that bearish on copper and oil though, but I do think they are ripe for a moderate pullback.

Regarding Treasuries… I think the 1994 like sell-off is over.