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thinkorswim, inc.
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Oct

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October 7, 2007 Market Report

Filed Under Market Snapshots 

Well, there is an old axiom that says something like “a sane man who dwells in a society of the insane, will then appear insane himself”.  This paraphrasing is, I am sure, words that ring very true to market bears that find themselves scratching their heads after yet another decisive rally on Wall Street on Friday, based apparently on nothing but a tepidly favorable September employment report (does a few thousand extra service and government jobs signal an economy that is not ripe for a recession?).  However, relating once again to my previous quote, it is the crowd that moves markets, and sometimes being intrinsically “right” in a market that is “wrong” can make your portfolio become anemic with sound logic as the perpetrator.  There are many people with tremendous market savvy who have become broke based on their inability to abandon their own correct and sometimes precocious logic.

Having said that,  I personally cannot see much of a case for the health of a market where the basic prescribed key to rescue the economy is to cheapen the dollar, print more money and encourage Americans to purchase and consume things that they cannot afford that were bought from other countries that employ slave laborers.  I guess it’s easy to see that I am a little bearish on equities here.  I also would like someone to explain to me how it is now being proposed that these “strong employment numbers” that indicate  “healthy economy”  will now make the 50 basis point cuts that were basically priced in for the next two FOMC meetings now unnecessary.  Will that be bullish as well?  Not to mention the enormous draw downs by several large financial institutions, which was brought on by the still to be determined damage by the credit crisis and reckless loaning/borrowing.  In addition, we also must deal with the constant specter of outlandishly priced energy and commodities.

Earnings season is upon us, and with the expected aggregate numbers to be much lower than previously expected (according to the analysts), one would expect some warnings to be forthcoming.  The DOW did sell off quite significantly in the last hour of trading on Friday, which could be somewhat comforting for the bears.  However, after the close, previous month’s employment numbers were revised to show stronger data.  I guess someone saw what a few extra jobs in Sep. could do to the market and then decided that better numbers from the last two months could give us even more upside.

Technically, it is obvious that the markets are having a difficult time with these levels, and while I predicted last week that we would find the all time high imminently, I also said that I believe consolidation will occur for quite a while at these levels.  With the VIX down 1.53 for the week to close at 16.91, I feel fairly comfortable that will be the case.  That would mean a concentration on selling premium such as buy-writes, short iron condors/butterflies, long condors/butterflies, long time spreads, and vertical spreads with short at the money options.  I personally use a 3% false violation parameter when considering a move to be a violation of resistance, especially in the indices, and we are quite a way from there.  But still the question remains. Is bad news good or bad news bad?  Fighting the tape is a lonely place regardless.

Gregory Wolfe

The Options University

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