Henry Potter Paulson Stars in "Its a Wonderful Knife" ~ The Risk Averse Alert

Monday, March 17, 2008

Henry Potter Paulson Stars in "Its a Wonderful Knife"

Are we witness to a ruthless power grab? Obviously, something very nasty has been set into motion with the take-down of Bear Stearns. Although BSC is not in the S&P 100, fully 20% of all stocks in the S&P 100 are financial institutions. Just how many are overweight fictional assets, like subprime mortgages and CDOs, (or soon-to-be fictional assets, like auction-rate securities) is unknown. A few biggies (C, LEH, MER) appear to be under some considerable measure of stress not dissimilar from what BSC fell under prior to its spectacular collapse.

Jim Cramer has given the CEO of J.P. Morgan/Chase, Jamie Dimon, the name "Potter" (from "It's a Wonderful Life" fame). But is Dimon really cut out for the part? Truth is he is not a skillful liar. Word has it Treasury was advising JPM on how it should go after BSC. Like Cramer, Treasury Secretary Paulson is a Goldman man. Something smells fishy here.

Trouble now is we might first learn who was on the grassy knoll on November 22, 1963 before the names of the real shooters of BSC are disclosed. It's no strange coincidence the present challenge to the solvency of our modern day, anything goes, rock-n-roll financial system is occurring during an election year. The "Pigs on the Wing" wouldn't know a Fascist from Alexander Hamilton ... Senators, Governors and Mayors alike ... and now that the cake has been baked, it is only natural the candles be lit. This just in from the grave... Ken Lay howls a warning to Jimmy Cayne not to vacation in Vail.

Enough pontificating...

Nothing about today's hot news changes the big picture in which a spectacular melt up preceding a colossal melt down is expected to unfold in the stock market over the months ahead. That is "for the record." Although such "long-term" perspective may not seem a critical component to executing risk averse stock index options trades, it is very useful for isolating short-term possibilities and identifying immediate opportunities.

OEX 5-min
This stock market might seem a thing of ugly, but there have been no surprises here. You can go back these past several days and read for yourself.

So, about today's further continuation of RSI divergence, why was no trade recommendation made as was suggested on Friday "might be in order?"

Well, because RSI did not rise above last Thursday's high until late in the day. Now we need to see the S&P 100 fall back to the area of today's low, while RSI continues to diverge. If this happens, we might be in for a lightening quick "long" play. But then again, maybe not.

Given all the turmoil we're seeing, it might be wise to stay on the sidelines for a bit. Higher risk premiums are making a quick-hit Call position more pricey than desirable.

It might also be wise to lower the ultimate objective of the counter-trend rally we've been anticipating. Previously, we were looking for the S&P 100 to advance to the 645-650 area before the stock market embarked on the final leg of its multi-month decline. 630-645 might be a better objective. Those who have been spooked by BSC (also fearing prospects for other financials in the "hit" parade) might be quicker to sell now.

Odds favor the S&P 100 going out in the 600-605 range when the March OEX contract expires on Thursday. It could go higher.

Looking at the four nearest March OEX Put strikes below today's S&P 100 close (593.48), there are 24,492 [out of the money] contracts open. Contrarily, on the Call side there are 2,150 [in the money] contracts open. That's an 11-1 ratio. So, odds of the stock market falling into Thursday's expiration seem small.

Overhead, the disparity between [in the money] Put open interest and [out of the money] Call open interest for the next two strikes (namely, 595 and 600) is 3.78-1. Open interest at the 605 and 610 strikes is more or less balanced.

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Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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Margaret Everitt said...

Tom, I would love to talk to you! Please call me. My number has not changed. Margaret...your long lost friend in Lakewood, Ca.