Floor Building Early in a Bear Market ~ The Risk Averse Alert

Tuesday, October 11, 2011

Floor Building Early in a Bear Market


The most surprising development this week has been the CBOE Put/Call Ratio's turn higher. This is quite opposite my expectation. Taking a closer look at this measure in the context of the Elliott wave currently unfolding relevant conclusions follow...


$CPC

At this point in the midst of a massive, 5-wave decline from July 2011 peak (this targeting index levels last seen in the 1987-1994 period) put options might best be seen a cheap means of controlling the rate of descent. Rights converted become short sales to be covered, which act puts a floor under prices.

So, first, given what lies in store over months ahead, a marked increase in material assurance a floor can be established confirms an increasing risk the market will need picking up from the floor.

Then, consider the hedging dynamics pattern indicated by successive red-green-black dots marked above mapped to the S&P 500 below.


$SPX

The setup for creation of a new floor is in place. The S&P 500's underlying technical state only the more raises the probability that, bottom will soon fall out...


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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