More Same Signs of Distribution ~ The Risk Averse Alert

Monday, March 22, 2010

More Same Signs of Distribution

You might recall a couple weeks back — early in March — when, more or less out of the blue, OEX call open interest had jumped ahead of put open interest for the first time in months, and the thought was that, short equity positions were being hedged, signaling an approaching end to the market's rally off early-February bottom and an imminent resumption of selling that began mid-January.

Well, obviously, this is not what happened. So, what are we to make of this seeming head fake, then?

How about considering it but more of the same old, same old ... such as principally has been driving trading over the entire course of the market's counter-trend rally off March '09 bottom. Do you remember the drill? Sell calls, squeeze shorts, sell stocks to call buyers exercising their right. Lather, rinse, repeat. Was early-March but another instance of this same exercise?


It appears March 5th marked phase II (squeeze shorts). Volume is the give-away. And now, phase III — distribution's work-in-progress — appears near its end, judging by RSI and MACD.

Yet for the moment let's stay on track with the message from the OEX options pit, because with the March contract now off the board two things of note stand out...

First, nothing yet suggests an imminent repeat of the same exercise in distribution as has recently transpired. The April contract begins with OEX call and put open interest virtually even.

Which leads to a second, more critical, observation...

Were those interests who have been taking on new long equity positions among strong hands, their positions would be accordingly hedged, and reveal strength over the opposite side of the trade with dominating numbers. In other words, put option open interest would considerably exceed that on the call side. This is not the case here (nor has it ever been at any time over the past year when a new OEX contract front month began).

So, quite simply, we have further evidence stocks continue to be distributed into weak hands. Rah rah all they like about supposed "resiliency," all signs continue suggesting today's longs are being set up for tomorrow's slaughter.

Fast Money
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