9 replies to this topic

[Bond_Guy]

In early May 2006, I gobbled up some cheap DJX puts and made a pretty penny. That event seems to be repeating itself. If you look at deep in the money DJX puts such as the July 2007 139s. You can buy them for about a $.40 discount to the intrensic value. In fact, the July 2007 puts are cheaper than the June 2007 puts. Not supposed to work that way. To me that indicates that all the money is on one side of the market. With bulls all in and shorts afraid to short, appears to me that the top is in place. History usually repeats.

[CLK]

Can you provide a link ?

[Bond_Guy]

Can you provide a link ?

JULY 2007 139 PUTS LINK

http://www.cboe.com/...ticker=DJY SI-E

JUNE 2007 139 PUTS LINK

http://www.cboe.com/...ticker=DJY RI-E


Also note that deep in the money calls have about $2 premium in June and July. As I said, looks like the bets are one sided just like May 2006.

[CLK]

Can you provide a link ?

JULY 2007 139 PUTS LINK

http://www.cboe.com/...ticker=DJY SI-E

JUNE 2007 139 PUTS LINK

http://www.cboe.com/...ticker=DJY RI-E


Also note that deep in the money calls have about $2 premium in June and July. As I said, looks like the bets are one sided just like May 2006.

Interesting. Thanks.

[jjc]

In early May 2006, I gobbled up some cheap DJX puts and made a pretty penny. That event seems to be repeating itself. If you look at deep in the money DJX puts such as the July 2007 139s. You can buy them for about a $.40 discount to the intrensic value. In fact, the July 2007 puts are cheaper than the June 2007 puts. Not supposed to work that way.

To me that indicates that all the money is on one side of the market. With bulls all in and shorts afraid to short, appears to me that the top is in place.


History usually repeats.

Great post. Thanks.

I'm a little reluctant here to use historical options data to measure the current sentiment due
to the recent SEC margin requirement changes (and the flood of newly printed money) the equation changes a bit; Not to say that your analysis is incorrect just that I'm reluctant to weight the data heavily.

[Bond_Guy]

I agree, one year's worth of history isn't statistically significant. I was very surprised last year to see these in the money DJIA puts being offered at a discount to their intrinsic value. I was shocked to see it price that way again this May. Back in February when the market sold off sharply, the premium was around $2 on the put side. That has evaporated and turned to a discount. If it doesn't signal a top, at least it is an inexpensive way to hedge a long portfolio. I'd be bullish if the earnings weren't heavily inflated by the the falling dollar, the consumer wasn't being pinched by higher gasoline, and the housing market collapse (tightening of credit) was over. However, the economy is likely to fall apart with these constraints and because the FED and the US Treasury has sold its soul to China. The market may have not peaked but when it turns it will go down strong and stay there awhile.

[wyocowboy]

Hate to rain on the parade, but you and everyone else have a good reason to expect a downturn. That is why I expect a relentless run up. But if you want to discuss fundamentals, just compare earnings yields on bonds to stock earnings. Fundamentals are driving the market higher, but folks refuse to recognise it. The top is nowhere in sight....but as Barron's noted, "Even the Bulls aren't so Bullish".

Edited by wyocowboy, 06 May 2007 - 01:25 AM.

[Bond_Guy]

No rain here. What you don't understand is that I expect a sharp upturn in long term rates. Your cost of capital approach to valuation is going to take it on the chin. The 10 yr T-note is absurdly low because of foreign buying due to the large trade imbalance. When the US economy slows we will import less from China and Japan resulting in fewer buyers of our debt or outright selling. Without their support in our bond market, long term treasuries will sell off. I expect to see the yield curve steepen over the next 12-18 months. Short term rates will fall while long term rates rise. If the Fed decides to cut rates, they will just exaggerate the selloff of the 10 yr t-note because they will increase the inflation risk. Oh, by the way, take out the earnings boost from the drop in the dollar and your not looking so hot. In fact, even with that boost, earnings rates are declining.

[Russ]

http://www.safehaven...rticle-7427.htm
Bob Hoye of Institutional Advisors on April 27th:
"Stock Market: The huge zoom that prompted a cluster of "upside exhaustion" readings in February continues to be the salient feature. These readings had not been seen since 1Q 2000, which then suggested the possibility of a cyclical peak for the stock market.

The next steps in the pattern would be the initial plunge followed by a vigorous rebound to test the highs. It was noted that on the positive side this would be accompanied by strong commodities resulting in a vigorous culmination.

As observed last week, because this was coming in close to schedule it could be called "rational exuberance". The Dow rally from 12,243 on March 28 amounted to 548 points with gains being made on 12 out of 13 trading days. Nearterm momentum is close to the point that typically ends a rally.

Of interest is that the dollar index is approaching the equivalent oversold condition.

Overall it looks like the stock market is accomplishing a critical test of the February extravaganza, as the dollar is approaching the most significant low since late 2004. This makes sense as it is being accompanied by a significant low for gold's real price, and its worth adding - a possibly significant low for real long corporate interest rates.

On the big schedule the exuberance is flourishing within the window when the yield curve does the big denial usually found at the ending stages of a bull market. Typically the bull will run some 12 to 16 months against an inverted yield curve. February was month 12 and the curve has turned from maximum inversion at -15 bps in February to around 0 bps.

Often the transition to steepening marks the beginning of the postboom contraction. This pattern prevailed when central bankers were employed to maintain the gold reserve backing the currency until the central banks were corrupted by financial adventurers with reckless notions about a centrallyplanned economy.
In so many words, the inversion with a boom, and subsequent steepening is not policy-induced so there is little to be gained by "watching the Fed".

What's more we are likely at the time when there is little to be gained by watching the orthodox economic measures as well as each week's breathless anticipation of such announcements.

Market history records that there is a cycle for business activity, a cycle for credit expansion and then there is a cycle for share certificates.

Now this may be very oldfashioned, but the advantage of watching the behaviour of stock certificates is that at cyclical peaks they usually lead the business cycle by about 10 to 12 months.

This, along with central bankers chronically being some 3 to 4 months behind cyclical changes in shortdated market rates of interest suggests little to be gained from obsessing about Fed utterances.

The important thing is to appreciate when market forces will curb policymakers' compulsions to utter credit.

The advice was to lighten up as this rebound and test became exuberant."

[atlasshrugged]

In early May 2006, I gobbled up some cheap DJX puts and made a pretty penny. That event seems to be repeating itself. If you look at deep in the money DJX puts such as the July 2007 139s. You can buy them for about a $.40 discount to the intrensic value. In fact, the July 2007 puts are cheaper than the June 2007 puts. Not supposed to work that way.

To me that indicates that all the money is on one side of the market. With bulls all in and shorts afraid to short, appears to me that the top is in place.


History usually repeats.

Youve been spot on so far way sway now