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The Milking of the Market


Something is happening here, but you don't know what it is, do you Mister Dow Jones?

Now you see this one-eyed midget
Shouting the word "NOW"
And you say, "For what reason?"
And he says, "How?"
And you say, "What does this mean?"
And he screams back, "You're a cow
Give me some milk
Or else go home"
Because something is happening here
But you don't know what it is
Do you, Mister Jones?

--Ballad of a Thin Man, Bob Dylan

Something is happening here, but you don't know what it is, do you Mister Dow Jones? If there was ever any doubt about the role of hedging, derivatives and structural considerations versus value and growth investing, it was cleared-up on Friday's gap up on the opening rotation of the S&P 500 names as the futures expired. To wit, the milking of the 1500 S&P strike since early June. 1540 S&P to 1490 S&P and back to 1540 S&P. That's some nifty fifty round trip bowling for strikes; that's some pin action.

From my perch, I think it easier to consider that last week's rally and the close at the high of the week is better viewed as a function of quadruple expiration rather than of Friday's inflation data points.

Is there any serious money that believes hot headline inflation numbers can be pooh-poohed in favor of cool core inflation numbers? Is there any credible money being put to work that doesn't believe, as Jimmy Rogers says, "The government is lying to us about inflation"?

Is there a hedge fund worth its salt that doesn't think the government fudges?

We remember that the Thursday, the week before options expiration is often what I term a "misdirection day." Thursday a week ago was a doozey of a misdirection – a twenty-seven point downer in the S&P to 1490. Friday's close a mere six sessions later – 1532.90.

After the stab down on June 7th to 1490, I stated that if there was no downside follow-through there was a good likelihood that the S&P would be up every day the following week and close near the high of the week. There was no follow-through. After the debacle a week ago Thursday, Friday saw a big reversal up. Once again the index held recent lows which coincided with the 50 day moving average. Tuesday was the only down day last week.

Rather than rally around the economic cheerleaders and interpret Friday's advance as a new injection of Botox for Goldilocks' recent smile wrinkles, the rally since a week ago Thursday may be better viewed through the following prisms:

  • Since the February/March market heart attack, there was a lot of hedging. Shorts on the S&P futures were initiated to protect. Money managers don't change their fundamental thesis in the middle of a heart attack. Rather, they pop some put pills and inject some short futures to clear their arteries. Rather then sell long positions and hit underlying bids beneath which would only further serve to deteriorate an unstable condition, they hedge. These short future baskets have been squeezed since March. Either money managers were not going to or they were not able to unwind or roll out until the futures expired on Friday morning. I think this is one of the factors behind the persistence and relentlessness of the advance since the March low: after the March expiration, once the hook was in shorts were reeled up into June expiration.
  • The pipeline is plump with IPO's which means beaucoup investment banking fees. This includes the largest IPO of the whole bull market – Blackstone, due the last week of June.
  • The end of June will be the end of one of the biggest, if not the biggest quarter ends in history as the market has risen vertically in the second quarter.

Bottom line is there is a whole lotta muscle and a whole lotta dough with an agenda and a focal point till the end of the month. Not to mention a lot of time and price patterns that are also shaping up and clustering into the end of June and early July.

That doesn't mean the market has to skyrocket from here, although as I wrote recently in "A Pivotal Set-up Worth Watching," I have projections to 1570-1590 S&P, it just means that betting on the likelihood of a rollover right here, right now before the end of the quarter, seems to be the short straw.

Despite the strongest rally since April, this week I would expect the volatility to contract somewhat from what it has been the first two weeks of June as there is a lack of voodoo economic reports poised to be a rationale and the 150 SPYDER has been milked dry and expiration has witched its wand.

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A) After scoring a new Swing high on June 1st, the S&P has seen volatility expand as the index tagged its 50 DMA and ricocheted back up to tag its high. June has been more of a "Daisy" market as the 150 SPY strike was milked dry.
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