Hotter Than Summer 2007 ~ The Risk Averse Alert

Wednesday, May 05, 2010

Hotter Than Summer 2007

First, a little bear market perspective...


Red dots mark extremes in long position hedging at bottoms during the 2007-2008 period.


If the counter-trend rally off March '09 bottom is ended and the market has turned over and begun a protracted sell-off, it appears a supportive bid has yet to step in (a marked increase in put option hedging should accompany support). So, expect more selling straight ahead.

Furthermore, it is likely support following any upcoming market setback will require a larger long position than was the case in the 2007-2008 period. Thus, expect the CBOE Put/Call Ratio to exceed its highs during that period.

Indeed, anticipating somewhere near two puts for every call seems both reasonable (because the reverse also has been registered) and likely (because the worst of the bear market begun in 2007 lies ahead) at intermittent lows during the upcoming disaster.

Now... if the crisis in the Euro-zone ... and the fraud zone, too ... does not strike you as "this is like summer 2007" ... but hotter! Much hotter.

There's a mass strike, too ... with provocateurs throwing Molotov cocktails to boot. Today Greece, tomorrow some other sensational take-down target. And they call this global recovery!

You couldn't make this stuff up. Our world has the makings of a classic tragic drama. So, since the lesson of '08 advises one fear a [widely unexpected] smashing, it seems reasonable at this moment to anticipate the worst.

Fast Money
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