Anticipating Deer in the Headlights ~ The Risk Averse Alert

Wednesday, October 07, 2009

Anticipating Deer in the Headlights

If Goldman's "Big Banks Attractive" call had merit, would the Banco Santander IPO have traded so softly on a relatively stable day in the broad market? I think not. After all, BSBR is loaded with the same toxic crap as are other large, global banking institutions.

And all the talk about currency risk? It would be better spent on expanding corporate debt risk. Sure, the corporate debt market might be frothy now, but what will become of the financial landscape as the physical breakdown of the global economy proceeds? What are opportunities in equity when an expanding corporate debt burden meets earnings that fail to deliver? Would not bond holders likely demand a higher yield? What added value, then, can equities possess were risk higher up in the accounting food chain increasing?

None! Absolutely none. So, risk of an awful collapse in the stock market is quite fundamentally real.


In as much as June's spike in the CBOE Put/Call Ratio led to early-July's divergence with the S&P 500, seeing the ratio similarly signaling trouble, again suggests the S&P 500 has further to fall. Whether the CBOE Put/Call Ratio diverges in the process remains to be seen.


Looking back at VIX-ing a Top in a Very Big Bear Market we see RSI and MACD continuing their "alarming" transition. The risk of an imminent, steep sell-off continues to appear elevated, then.

And on that note, this just in...

Don't be shocked if major indexes this week trade higher than last week, but collapse before Friday's close, finishing the week lower. Picture resurgent confidence turned deer in the headlights staring at October options expiration week. Kaboom.

Yet it seems next weekly likely would not result in any steep, downside follow-through. Surely, the lesson this week has been that writers of Put options below the market possess the wherewithal to protect their positions ... allowing Call positions above the market they've likewise written opportunity to be exercised, thereby helping relieve a bloated inventory of dead equity while there's still time. Thus, the general effect going into next Friday's expiration (10.16.09) finding indexes little changed from last Friday's low (such as was thought possible the other day) remains my guide forward.

Fast Money
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