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Bulls May Panic -- and Traders Could Get Trapped


It won't be 1987 all over again -- but the echoes are impossible to ignore.

Editor's Note: The following is a free edition of Jeff Cooper's Daily Market Report. For a 2-week trial FREE trial, click here.

You may find yourself living in a shotgun shack
You may find yourself in another part of the world

- "Once in a Lifetime," Talking Heads

Experience shows that, if one foresees from far away the designs to be undertaken, one can act with speed when the moment comes to execute them.
- Cardinal Richelieu 1585-1642

This is how options expiration week started out in 1987: It was hard to get short on a large gap down open that saw little in the way of a snapback. That was true yesterday with the SPYder (SPY) closing near where it opened at 98.

While it is expiration week, and the market can do anything, if we don't see a strong snapback after the first 40 minutes or so of trading today, it will indicate the options expiration is for sale. This could create as much fear in the bull camp about losing half their gains quickly as the fear about being under-invested dominated the psychology prior to Friday. Things could get out of control. Quickly.

One of the factors in the 1987 debacle was that arbs shorted puts promiscuously to pocket premium in what was a persistent 5 month advance and it blew up in their face. The big players may be short 100 Spyder puts and don't want them to be redeemed. But the cycles could pin them instead of them pinning the SPYder to the 100 web.

With Baidu (BIDU) and Google (GOOG) down over 15 points apiece and the usual suspects leaving large range gaps and possible island tops, it suggests calls are heavy on the tape in the go-go names -- and traders may be trapped.

The news started breaking with the cycles last week, with the consumer sentiment numbers; and after the close on Friday, the fourth largest bank failure ever occurred.
No positions in stocks mentioned.

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