Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

S&P Watch: Could the Bottom Drop Out?


Safety net keeping the market from going lower is now gone.

Last week, in S&P Watch: Is 900 the Door, or the Floor?, I discussed how the 900 level in the S&P 500 might serve as a line in the sand. But June options showed a sufficient number of put options in place to act as a safety net.

That proved true: The index tested the 200-DMA twice at the descending levels of 911 and 908 before end-of-week options expiration buoyed prices.

But now we may be facing an expiration hangover. I mentioned in yesterday's OptionSmith missive that the put protection that would act as a safety net at the 900 line hadn't been rolled over or replaced in the July series, and suggested the S&P was likely to breach the 900 level today. As it was.

I'm now ready to pull out the divining rod and see where we go from here.

Saving Face

The configuration in June index options was heavily tilted towards put protection -- much of which was added in the week just prior to last week's expiration.

In one sense, that shouldn't be surprising: Money managers and hedge funds -- who had taken it both on the chin and in the lower extremities during the past year -- would be very reluctant to relinquish the 11% average gains they were showing while heading into the end of the second quarter. Prices are slicing lower in the momentum names, such as Research in Motion (RIMM), energy stocks like NewMarket (NEU), in commodity names like Potash (POT), in precious metals (see GLD and SLV), at banks, and with brokers.

Declining volume in both equities and options suggests investors shifted the adage of "sell in May and go away" for a few weeks. They tried to keep moving higher off the March lows, but -- after getting little marginal return -- they decided to get off the ride before they got sick.

The reinflation trade seems to have lost its puff.

New Configuration

But in getting off the rollercoaster, which had been on a 3-month ascent, investors also removed the safety net

The open interest in Spyder Trust (SPY) July puts dropped nearly in half -- from 4.5 million contracts to 2.3 million -- in the past 3 trading days. While I'm sure that number will increase after today's sell-off, it illustrates the market no longer has a solid floor in place. Right now, only the $90 strike in the Spyder put has a triple-digit open interest. And the options on the SPX 900 puts have 23,000 contracts, but overall, open interest is 18% lower than it was on the opening of April, May, and June's first day as the front month.

They say don't sell -- or is it don't buy? -- a complacent market. But one old saying seems particularly relevant here: Volume is a weapon of the bulls, and a market can fall under its own weight.

And it looks heavy right now.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos