Look Past the Bull and You Will See a Lurking Bear ~ The Risk Averse Alert

Thursday, June 04, 2009

Look Past the Bull and You Will See a Lurking Bear

Following yesterday's late-session S&P 500 futures jam job (the second in less than a week), today's trading yet again revealed just how little interest there really is in owning equities...


Observe the volume trend since March '09 bottom. This is the very picture of distribution from strong hands to weak.

As best as can be ascertained, the final exchange came early-May. Since then, further gains apparently have required help from the Chicago Mercantile Exchange (where S&P 500 futures are traded). Most telling is the utter failure of this to draw any significant new interest in equities.

Why is no one highlighting this troublesome volume trend?

OEX 5-min

All is proceeding as one might expect following Monday's (6.1.09) opening surge took 5-minute RSI to a buy-side extreme. Judging by the S&P 100's several advancing periods over the past ten days, today's advance exhibited some of the weakest relative strength yet (despite RSI generally remaining on the buy-side all day).

What can I say about this? One man's bull market is another man's circle jerk. Indeed, time will tell (and it won't be long) whether the CME has been enlisted to help strong hands build short positions...


Forgive me for being repetitive here. It simply is astonishing that, after the market's brutal decline into March '09 bottom the overwhelming sentiment has become cocksure bullish. Indeed, more than two months have passed since Put volume exceeded Call volume on the CBOE.

This is not healthy. Think "wall of worry" ... then, ask yourself, where is this being displayed?

Apparently the belief among some observers is that, Call buying largely is coming from players looking to exercise their right once the underlying equity moves in their favor. However, the volume trend seems to belie this presumption.

So, one wonders... Is Call buying instead hedging short equity positions?

We're also seeing OEX Put open interest catch up with Call open interest (this after having begun the June front month at about 2/3 of Call open interest). Normally, I regard the bulk of options open interest as hedging underlying equity positions. However, in this case I am not so sure.

Prior to its October 2007 peak, there were countless instances when the market was rising and equity positions were being hedged with OEX Put options. This typically resulted in an expansion of Put open interest over Call open interest and proved a very healthy condition. (If you think again from a "wall of worry" perspective, you realize that worried long equity players naturally would hedge their positions with Put options.)

Then, a normal bout of profit taking would set in and OEX Call open interest would begin catching up with Put open interest. This added Call open interest was assumed to be hedging short equity positions opened during the market's correction.

Right about the time selling was nearly extinguished and the market was about to return to its bullish ways, OEX Call open interest often would match (and sometimes slightly exceed) Put open interest.

One assumes, then, that some portion of this added Call open interest was positioning for the bull market's return.

Similarly, one presently wonders whether the added OEX Put open interest we're seeing is positioning for a return of the bear? Given the volume trend I rather strongly suspect it is...

Fast Money
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