Inside Baseball ~ The Risk Averse Alert

Friday, July 31, 2009

Inside Baseball

What to say? Chance are we have entered a brief period of suspended animation during which time all manner of divergences among various technical measures corresponding with the most recent manifestation of the market's massive short squeeze unfolding since March '09 bottom — a probability whose likelihood was projected way back last November 1st — likely will develop.

Then what?

Obliteration. Collapse. Chaos. Discrediting.

Presently, we're seeing previously purchased call options exercised (i.e. converted into long equity positions). Likewise, these new positions are being hedged with put options. This is occurring in a climate where time's passage is providing enough confidence that, with no small measure of help from the Chicago Mercantile Exchange, a new, massive wave of selling is made to appear unlikely.

This is all well and good ... and could sustain the present push higher for some days. But once expiration rolls around then what? Well, either hedges will be rolled forward (a costly proposition) or in all probability long positions stand vulnerable to being sold in a cascading wave of profit taking and/or loss mitigation.

So, keep your eye on the ball, and pay no mind to those on the playing field shouting, "Swing!" Today's bid largely is enticed, and this, itself, is revealing. Were stocks truly "oversold," there would be no need to placate those who perceive opportunity. That those interests behind today's bid are being placated — sold calls and given favorable conditions for exercising these rights — reveals stocks in all probability are being distributed from strong hands to weak.

Fast Money
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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

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.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

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