Scribble the word "write-up" on a notepad and stick it somewhere near your desk. Chances are, at a point this year, it’ll be part of the Wall Street lexicon.
Given the magnitude of the write-downs by the financials, we’ll eventually see an institution upwardly adjust the marks on their underlying collateral. That will undoubtedly spark a rash of optimism as traders race for exposure in the space. From where, quite obviously, remains to be seen.
We're in the early innings of a debt unwind that has a long way to go and more victims to claim. As our financial destination isn’t as important as the path that we take to get there—and nothing trades in a straight line—we need to remain vigilant for an “off-sides” versus the collective sentiment.
Expiration
I’ve been trading derivatives for seventeen years and through 200 expirations. I’ve tried to proactively interpret the bias since I was a rookie and can tell you one truth that I’ve learned: While it’s nearly impossible to game the direction, you can bank on the fact that volatility will be exacerbated in the days preceding the actual expiry.
I offer this thought as we ready to bury May paper on Friday. The market has been relatively tame of late but pressure is building under the seemingly calm financial surface. This does not go unnoticed by the powers that be, as evidenced by the string of officials that recently stepped on stage.
If the S&P, NDX, INDU and Russell can put aforementioned resistance underfoot, the potential for upside exacerbation exists. That could pave the way for a trading rally through Friday as front-month protection expires and the path of maximum frustration manifests.
See Both Sides
The bears will be quick to note that the put/call ratio is the highest it’s been since last December and the percentage of bullish advisors is at levels last seen in mid-January. Further to that, Moody’s is rattling the ratings cage on Ambac (ABK) and MBIA (MBI), which would have obvious implications for the derivative-laden financial fabric.
As I edge through the financial media landscape, I continue to be struck by those looking to be told what to do rather than understand how to do it. There are no easy answers, my friends, as the global equation continues to shift. I would be remiss in trying to craft advice to a faceless audience as each of you has unique needs.
What I can offer is that risk management trumps reward chasing, capital preservation is the first step towards prolonged profitability and financial intelligence will serve you in good stead. It may not be sexy but effective money management rarely is. That’s one of the misguided legacies left over from the bubble.
Good luck and remember that discipline trumps conviction no matter which way you choose to play.
R.P.
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