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Monday Morning Quarterback: Treating the Post-Expiration Hangover


Please allow a few hours for the post-expiration hangover to subside and remember that there are coordinated agendas in motion.


Good morning and welcome back to the slippery pack. On cue, twenty years to the day of the great crash, the animal spirits awoke Friday and reminded traders that risk is a two-sided sword. It was harsh, it was swift and it was Freaky. Welcome to October Minyans - the minxiest of all months!

While Hoofy will correctly offer that the sharpest corrections occur in the context of a bull market, Boo will counter that the cumulative imbalances have been steadily building. "Toss enough straws on the back of a camel," he wryly opined at Friday's Happy Hour, "and even the most steadiest of critters will belly up to the bar."

We've learned through experience that four primary metrics dictate the price action. We noodled them in kind before earnings began and they're worthy of revisiting as we find our way. While fundamentals on the aggregate failed to deliver, the steady action in Yahoo (YHOO), Google (GOOG) and Intel (INTC) (on the back of strong reports) leads me to believe that the downside catalyst was structural in nature.

Some will offer that expiration exacerbated the volatility but the bottom line contains no asterisks. Fresh credit and sub-prime concerns paved the downside path and psychology remains the key determinant of the year-end bender. Indeed, while bad news once sparked higher prices (remember the initial Citigroup (C) pre-announcement?), the recent reaction to news (Countrywide (CFC), Caterpillar (CAT)) has been decidedly harsher.

Therein lies the importance of our first Trading Commandment-respect, but never defer, to the price action.

Late Friday, while giving an impromptu 'view to Cody and Rebecca on Happy Hour, I offered that that the dollar would be a key tell on the back of this weekend's G-7 summit. The message from London was two-fold.

First, near record oil prices and the housing slowdown will curb global growth. Second, for the first time in two decades, they collectively rebuked, calling on banks worldwide to be wary of the risks associated with doing business with the Islamic republic.

To the first point and reiterating my thoughts shared late Friday, "Watch the dollar as the (five-year) weakness has served as a rising tide that lifted all asset class boats, from metals to equities to crude. If the greenback finds a bid - and if crude and metals slip, I would be careful with equities."

The "lower oil, lower stocks" vibe got a few perplexed looks throughout the room but it's consistent with the "asset class deflation vs. dollar devaluation" vibe we've been espousing for years. And while that's a big picture perspective, I would note the dollar (DXY +80 bips) this morning as crude (-2%), gold (-2%) and the pre-market futures (S&P –10 handles) punk.

Please allow a few hours for the post-expiration hangover to subside and remember that there are coordinated agendas in motion. Free markets? Free Willy… and free your mind, Minyans - this is where we'll earn our coin.

Random Thoughts

  • We mused last Tuesday that S&P 1523 was vibing on the near-term antennae and while that seemed wrong as a song at the time, that level was eaten for lunch on Friday. Taking a fresh peek forward, S&P 1495 seemed like the next logical step and, if it wasn't for the expiration magnet at S&P 1500, we could have hit it during the very sloppy close.

  • As goes the piggies, so goes the poke? Hoofy certainly hopes not as the BKX tickles 2007 lows and Citigroup teeters on levels unseen since 2002.

  • Remember Thursday's interview with Steve Shobin? Note that the VXO has trickled through his aforementioned 21.5 level.

  • Sigh. Hmmph. Grrrr. Congrats Red Sox.

  • Is sentiment panicky? Yes, I see that 20-something spike in the VXO on Friday but remember, Minyans, the Institutional Investor sentiment index was the third highest in history last week. One day does not a shakeout make.

  • As for my trading, I dug up and sold some dead and buried puts on Friday (better lucky than smart) and sold 25% of my S&P December puts as a discipline. I'll likely sell another 25% if we open in the hole and take a fresh look. I was, as you know, a bit chilly in my feel and, as a matter of course, I like to edge back into risk taking behavior after I start seeing the seams on the ball (rather than pressing).

  • Yesterday was healthy day in Toddosville as I attempted to balance the mind, body and spirit. I started the day with yoga (nothing crazy, just some plain vanilla yoga), continued with a five-mile run through Central Park (what a day!), kicked it with some football and brought it home with a massage. Long time coming and very noice!

  • "Given how much banks have sold off last week, I would caution folks about assuming that the banks continuing to fall in a straight line from here. Sure a credit market collapse is possible, but as I recently wrote, the picture of a series of waterfalls is more likely to be the case. Honestly, I think the better risk trade is either UltraShort Oil & Gas (DUG) or UltraShort Basic Materials (SMN). While the former is up big today (6+%), both look like they have formed bottoms, whereas UltraShort Financials (SKF) has already moved." Minyan Peter (position in SKF, SMN and DUG).

  • Deutsche Bank AG (DB), Credit Suisse Group (CS) and other members of the Institute of International Finance stopped short of endorsing an $80 billion plan supported by the U.S. Treasury to revive the commercial paper market. It's "premature to make a firm judgment as not all the details are yet known to us or are fully announced,'' said Deutsche Bank Chief Executive Officer Josef Ackermann, speaking on behalf of the 31-member board of the finance institute at a press conference in Washington. To succeed in restoring investor confidence, the plan would have to provide "transparency'' to the prices of financial assets, Ackermann said. (BTIG)

  • We're all about community in the 'Ville and our human capital will be out in force for the December 7th Festivus. From Jeff Saut to Steve Galbraith to John Succo to Bennet Sedacca to Stephanie Pomboy to Minyan Peter to Michael Santoli to Jeff Macke to Guy Adami to YOU! Yes, YOU! It's gonna be a ton of fun and as we priced tickets to move, they're moving! Net proceeds will benefit the Ruby Peck Foundation so please help us as we shift an eye towards the important stuff. It's what we do!

  • Good luck today!


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