There have been periods over the past few years when an excess of OEX put option hedging appears to have signaled an exhaustion in the market's capacity to advance. Indeed, stronger hand longs apparently pulling away and hedging remaining exposure (as well as cheaply establishing rights to short positions) can be thought to have had the effect of pressuring the market lower at certain interims over the 2008-2010 period...
Earlier on these put option excesses occurred at the precipice of what became steep falls. Since March '09, though, these hedging excesses rather have preceded but corrective waves of the five-wave advance off bottom (this forming wave C [up] of an A-B-C corrective wave from November '08 bottom).
Lately, something confirming the sort of nasty transition I envision might be thought revealed by an OEX Put/Call Ratio exposing just how vulnerable is confidence.
The sudden spike in OEX put option interest — this likely by way of a Eurozone whose unraveling is accelerating — speaks volumes about animal spirits (or lack thereof) necessary to sustain an advancing stock market!
So, over the past year we probably have seen about the best performance out of the market that the present, psychological state can sustain before being overcome with fear.
Note, too, fear's present elevation is occurring immediately following the market's advance, post-May 6th flash crash: an advance rather curiously featuring an odd absence of fear ... unlike the entire year 2009. So, a fearless, post-flash crash long equity interest that, up to early-November top proved increasingly disinclined to hedge positions (via OEX put options) now stands exposed by a sharp and decided vote of no confidence cast by strong hands whose demonstrated fear over the past few years probably should not be ignored.
Also observe how behavior of the 10-day moving average of the OEX Put/Call Ratio since March '09 bottom coincides with the unfolding of what are thought five waves higher (ending at November 2010 top). Hedging via put options was most decided (as might be expected) during formation of the third wave whose unfolding occurred over the second half of 2009. Following this, an increasing absence of apparent need to hedge long equity positions via OEX put options has been evidenced, and this as the fourth and fifth waves (of wave C up from March '09) are thought to have unfolded over the course of 2010.
One finds, then, most fitting circumstance, indeed, at a moment when from an Elliott Wave perspective with solid technical substantiation the market's collapse is feared threatening.
An accidental perspective for your consideration. The NYSE Composite's 200-week moving average (as opposed to its 200-day) presents an interesting study comparing the market's present circumstance to that early in 2002.
Longtime readers will recall that, well before March '09 bottom it was my view that a counter-trend rally similar to that subsequent to the market's post-9/11 collapse could be in order. The manner in which this similarity has come to pass, as well as demonstrate foreboding continuity vis-a-vis the NYSE Composite's 200-week moving average is a worthy curiosity. Weekly RSI, too ... quite possibly offers icing on the cake.
The range in which the NYSE Composite traded from 1987-1994 is seen above between red parallel lines. That's the NYSE Composite's upcoming objective. The trip there could be incredibly rapid. So says 2008 still...
* * * * *
© 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.
There's an easy way to boost your investment discipline...Get Real-Time Trade Notification!
