Monday, October 18, 2010


The real question is, how effective will the forthcoming Fed easing be - the only tool they have left to stem the economic decline? The Fed buys Treasuries and MBS, which provides cash for banks, corporations and other institutions, hedgers and the public, who turn around with an interest rate carry trade and buy Treasuries (10 to 1 over stocks), or invest in other countries that are business-friendlier, or buy back stock and raise dividends.

In a Contrarian's Delight, several asset classes have been on a tear this Fall, with stocks ignoring the worst seasonal slumps (so far), the dollar crashing, bonds metals rising to record levels.

Was option expiry week the end of these moves or just a breather? We are also coming into the best seasonal 3-month period; pre-election (2011) year is the best of the 4-year cycle (per J.P.Morgan's quarterly report, year 3 has averaged 16.6% since 1940, with year 4 a distant second at 8.4%). And the upcoming election bodes well for stocks.

Morgan's report also states there is $9.4T in CASH (M1-2, Institutions, public) gathering zero interest as of August 2010. But Sentiment readings are not what Bull markets are made of:

The McClellan Summation is close to +1,000 and the Bullish % of stocks is over 70%; high numbers of outflows occurred in MMFs and equity mutual funds.

Corporate Insider Selling jumped last week to 93:1 over Buying - I know colleges are expensive but not that much (the usual suspect)!

After an enthusiastic reception to a talk on my DITM covered call strategy last week at the Silicon Valley Option Group in Santa Clara, I've decided to start a "sister" blog: I have posted my actual trading results and annualized returns from 2009, 2010 YTD, and will update as stocks are called away or sold. Although I hope for double-digit gains annualized ( since it also offers a very good safety net, cash is not an option), option volatility is touching a low 18, as measured by the VIX last week, versus a 95 during the 07-08 slump. Downturns in a stock or market will raise that considerably.

Even high single-digit returns with only a danger of a Bear market loss is certainly worth looking into:

Morgan's statistics show since 1990 - Inflation was 2.8%; average investor gains (mostly mutual funds) 2.3%; homes 3.2%; Gold 5.2%, bonds 7%; and S&P stocks 8.2%.

Here are last week's numbers:

MktSentiment Last WeekPrev. Week 5 Yr HI 5 Yr LOW
S&P 500:117611651561683
CBOE Eq. put/call: 526196-10/0846-1/03
McClellan Osc:(1)21108(123)
McClellan Sum:9528661568(1514)
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AAII Bull:
AAII Bear:
US Equity-1 week lagn/a(5.6B)
Money Market Flows(5.8B)(.5B)

Baltic Dry Index:2769269611700663
Bullish %:
Insider Corporate Sellers:93:121:1108:12.4:1

With record numbers of dollars coming out of Money Market Funds, mostly into the crowded trade of short term bonds, anyone who has a minimal knowledge of covered call options and/or an interest in hedging stock market exposure might want to check out: for an alternative strategy that is low-risk as well as highly rewarding. For those of you wanting more details and actual trading results, a new book is available for $14.95 at Zero (IN)Tolerance

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