Follow Up – (SPY) May 31, 2012

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.


Explanation to Previous Trade:

Trade Alert – (SPY)

Buy the (SPY) August $131, 2012 puts at $5.00 or best

Opening Trade


expiration date: August 17, 2012

Portfolio weighting: 5%

($5,000/100/$5) = 10 Contracts

The abject failure of the equity indexes to breach even the first line of upside resistance does not bode well for the “RISK ON” trade at all. Only a week ago I predicted that the markets would be challenged to top 1,340 in the (SPX) and $78 for the Russell 2000 (IWM). In fact, we made it up only to 1,335 and $77.90 respectively.

To see the melt down resume ahead of the month end window dressing is particularly concerning. That’s the one day a month that investors really try to pretend that everything is alright. People just can’t wait to sell.

Blame Europe again, which saw Spanish bond yields reach a 6.6% yield on the ten year and the Italian bond market roll over like the “Roma” (a WWII battleship sunk by the Germans while trying to surrender to the Allies). Facebook didn’t help, knocking another $8 billion of its market capitalization, further souring sentiment.

Urging traders to head for the exits were confirming weakness across the entire asset class universe. The Euro is in free fall. Copper took a dive. Oil is plumbing new 2012 lows. Treasury bond prices rocketed, taking ten year yields to new all-time lows at 1.65%. It all adds up to a big giant “SELL!”

It is just a matter of days before we revisit the (SPX) 200 day moving average at 1,280. Thereafter, the big Fibonacci level at 1,250 kicks in. It is also exactly one half the move off of the October 2011 low, and unchanged on the year for 2012.
I am not looking for a major crash here a la 2011. There is just not enough leverage and hot long positions in the system to take us down to 1,060. It will be a case of thrice burned, four times warned. And remember, last year’s 1,060 is this year’s 1,100, thanks to the earnings growth we have seen since then. With 56% of all S&P 500 stocks now yielding more than the ten year Treasury bond, you don’t want to be as aggressive on the short side as in past years, when bond yields were 4 or higher.

By knocking out a short in the (SPY) here, I am also hedging my “RISK ON” exposure in the deep in the money call spreads in (AAPL), (HPQ), and (JPM), and my (FXY) puts. And the delta on these out-of-the-money’s are so low that I can hedge the lot with one small 5% positions in the at-the-money (SPY) Puts.

If the (SPX) hits 1,280, the (SPY) August, 2012 $131 puts will add 2.25% to our year to date performance. At 1,250 we pick up 4.00% and at 1,200 we earn 7.00%. I now have the option to come out at any of these points in the opportunity presents itself, depending on how the rapidly changing global macro situation unfolds. If we get another pop from here back up to the 1,340-1,360 range I will double up the position and swing for the fences. There’s no way we are taking a run at new highs for the year from here.

It's Puke Out Time Again