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February 9, 2009

More of the Same

There is really not much new to add to our market view after today's action. A very narrow-range session played out on low volume, banks saw an expected bit of follow-thru on their recent rally, and the trading world still awaits a break out of the tiring range we've been muddling through for over two months. Despite bullish price patterns, I remain skeptical that any sustained upside can be had. I mean, just look at the put/call ratio for instance:

stock market indicator

The Treasury is also augmenting the size of its auctions and has even recently added a 7-year note to the mix. Absorbing all this cash from the system cannot be healthy for the equity market. At some point the supply will force prices down (rates up) and further hinder stock valuations.

In my opinion, the longer this market moves sideways, the greater chance the next big move will be lower. Of course, breaks from these toiling zones tend to be sharp, so if I'm wrong, I'll likely be wrong in a big way. Along those lines, I decided to throw a few straddles into my portfolio on some individual equities. For the record, the issues chosen were CME, MSFT, and RIMM. Now I'm sure some wanderer will jump on this revelation to ask a pretentiously detailed question about whether I used a Black-Scholes or Cox-Rubenstein model to determine fair value and optimize my option play. If I were an arbitrageur, I would give an equally pretentious answer, but the truth is considerably more ingenuous. I used my thumb, as is rule of. There is no particular reason for my choices other than that the price of the straddles seemed cheap compared to recent ranges in the underlyings.

I also decided to short some gold after peering at the chart this evening:

gold chart

One has got to think that after three rejections, bulls will have to retreat and regroup. If this market is truly strong, price could turn back up from as high as $880. If gold bounces strongly off that level, I'll be chased back out. However, I am still a proponent of a larger deflation scenario, and will astutely be hunting signs that another major down leg will occur, in which case I will naturally push my bets.

Since today's action didn't really offer much fodder, I will close today's post with a chilling, longer-term view of the S&P 500:

stock index chart

The world in which we live will not be a very delightful place should the pattern resolve as projected. Oh, and have a pleasant evening!


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