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November 27, 2006

One Percent

So this is what a one percent down day feels like. I'd forgotten such pleasures. It has been 5 months since we have witnessed a one percent sell-off in the S&P500, and we have not seen such relentless selling since early summer. It truly feels like we're on to something here. Perhaps Friday's special post was well-timed.

So, for bears fooled by several false breaks since summer, can this break be believed? There are some telling signs in today's action. First, as noted last week, this selling follows a break of major support for the U.S. dollar. Second, glamour stocks such as Google and Research in Motion took beatings. The selling was ubiquitous rather than concentrated in one sector. There was not a single bounce of any significance throughout the session, and the indexes went out on their lows.

The true tell will come, of course, over the next week or so. I suspect we'll get a brief bounce just to make the bulls think today's action was another mini-correction, then the market will be jolted by more serious selling, and the bottom will fall out as everyone tries to exit ahead of everyone else. I have already positioned myself for this scenario via shorts and index puts, and I intend to add to my equity puts if the action confirms my suspicions.

On another note, I have begun eyeing oil again for at least a trade. From a contrarian standpoint, a rally at this point would seem to be quite unexpected. From a technical standpoint, oil is sitting on its bull market trend line with bullish divergences in place. The macro view is the one that bothers me. A weakening economy would imply lower demand and hence prices. To protect myself from this downside, I may begin to re-enter the energy fray via call options on oil itself and then add longer-term equity positions if the action plays out well. This idea is still in the thought process, and I will keep my thoughts posted here.

Disclosure: Long RIMM Puts


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