Diary of a Financier

S&P 500: Have No Fear (Yet)

In Capital Markets on Fri 11 Mar 2011 at 12:55
  • Everyone was just complaining about soaring commodity prices, now they’re panicking about prices falling!?
  • Not worried about SPX yet, but watch for MACD & SStochastic support.
  • I bought SPY June 125 puts @ $3.60 for protection.
  • With all the bears still making noise, we’re not to Greed/Conviction yet & not ready for a protracted market correction.

I’m still relatively constructive on the stock market.  If you turn back to the start of the spike in Oil (as a consequence of social unrest in the MENA states), I had mentioned that the divergence in single name volatility (VIX) & index implied correlation (KCJ) told me that the market was flashing false sell signals.  That was absolutely correct, along with my read on the VIX dipping below 20 before turning up again to retest its resistance.

I prompted an analyst to run a study on the divergence between VIX:KCJ back from the intraday on February 22.  My hunch was that the outlook for the hit to consumer stocks was offset by the potential for a rise in energy stocks, thus traders saw little incentive to take derivative protection against broad indices (the net-net being a push), favoring instead to hedge their single names that were threatened by higher input prices.  After parsing options activity for SPX components, my analyst came back with what boils down to, ‘I would agree with that thesis.’

Look at the reaction of Consumer Discretionary (XLY) stocks compared to Energy (XLE) since the day of oil’s big spike:

XLY v. XLE- Energy kept running after the Oil spike, Consumer Discretionary moved to the inverse.

I find it ironic that everyone was panicking about the downside engendered by soaring commodity prices & oil; and now that these inputs have all come off highs, everyone is panicking about… the downside!?  Remember the CEOs on CNBC at the end of last week, ‘$110 oil is where the consumer really gets hurt.’  I’m befuddled.  Yes, I know a big portion of this new panic was generated by China–who reported a surprisingly large trade deficit on Thursday, but as for commodities coming back to earth, isn’t that what we wanted?  This is a a positive catalyst, not a negative!

Back to the S&P 500 (SPX)… My last note was one of uncertainty:

For the SPX , my target is still 1425.   My expectation is a result of indicators (SStochastic & MFI) having turned up recently, with MACD holding on resiliently.  These indicators should break their resistance and lay waste to their troublesome rounded/declining tops.  My downside support is the last (61.8%) Fibonacci threshold at 1225, which has been substantiated as a bumper on three occasions in the past.  We decided not to take broad SPY exposure because of the wide bandwidth for this risk/reward makes it an unattractive bet.

The muddled signals (waning momentum v. resilient bull trend) hadn’t given me a definitive entry for a long or short position.  A tradeable development is nigh, however.  We’re at a critical level of trendline support for SPY, with indicators at critical support, as well.

SPY daily- Note the two risks I've been harping on: waning momentum in MFI and the rounded top in MACD. Not only is the price action fighting to hold trendline support, but indicators are about to break support.

I have purchased SPY June 125 puts moments ago at $3.60/contract:

With that in my back pocket, we’ll continue to ride a large 20% cash position, selective single name equities, and floating rate bank loans.  Since I expect the renewal of the bull trend in SPY soon, two very important technical notes persuade me toward this bullishness:

  1. This market continues to fade the negative news, rallying on the positive.  It’s a critical observation of the bullish resolve, and looking at the consolidation that’s ensued since 2/22, I find that the bullish resolve is still in tact.
  2. I hear a lot of noise from bulls & bears still.  Each comes out of hibernation every time the trend turns in his favor.  I reiterate the point I made back on 2/22: the Cycle of Psychology dictates that we’re not at a point of collapse in the markets, because with a bull/bear tug-of-war still en force, we haven’t yet transcended “Confidence” to “Enthusiasm,” nor the far reaches of “Greed & Conviction.”


  1. […] the end of last week, I posted an entry entitled “S&P 500: Have No Fear (Yet).”  This was before the fallout of the tragic […]

  2. […] action from the S&P 500.  To update the last SPY chart I posted on March 11 (a chart that kept nagging me): SPY daily- we have a failed double top, with both MFI & MACD having broken support in the […]

  3. […] back on March 11, I made the following observation: Since I expect the renewal of the bull trend in SPY soon, two […]


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