In the Blink of an Eye

We base our research on the proven fact that variances in option volume is known to be a predicator of impending moves in an underlying equity and that is what we follow but we take it to a level that filters out the trading that is not based on “smart money” and get to what is really driving a specific equity.

There has been a lack of option volume and trading on out-of-the-money call options in the last week and most of the trading is occurring in the at-the-money options. What does that tell us?

Well for starters there is a clear lack of risk in the near term by option traders, who are the riskiest traders, into the markets continuing to move higher over the next two months. Second, uncertainty as there is a lack of volume on the options trading within the next two months. Finally there is a lack of vision into the near term and that is what concerns us the most.

Earnings have been flowing in within the last week and some have been great and others have been mediocre at best. Forecasts for the remainder of 2010 are “in line with analysts’ expectations” and every time we get bad economic data there is so much cash on the sidelines, it provides a buying opportunity when the market sells off.

What concerns us is the lack of downside expectations by traders/investors and when that happens euphoria and unrealistic expectations start to take over and we all know from our past that the basic ingredients of a large market correction start with euphoria and lack of belief overall markets can move in the opposite direction.

Cash is driving the markets higher and sellers are just waiting to jump in. Our belief is that when the Q2 and Q3 consumer spending numbers come in lower than expectations combined with monetary tightening by the Fed the sell off will be fast and furious. For now, drink the “punch” and enjoy the run up but learn from our past, see the signals and understand it can turn in a blink of an eye….

As always, Good Luck investing.

Email the writer: