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Random Thoughts: Fear and Greed Face Off Into Quarter End


Will Pavlov's bulls buy another dip?


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

I penned a Minyanville Market Overview late Friday.

It was a thoughtful column, shared in a voice of yesteryear when I often used Hoofy and Boo as metaphorical representations to make sense of the world's wildest reality show.

This was a throwback column of sorts, one that chewed through our four primary metrics-fundamentals, structural, psychology, technicals-with hopes of identifying an edge. While I was gonna save it for this morning, I posted it in front of the weekend lest folks wanted to noodle our landscape in between football games.

At the end of the scribe, I referenced the fact that I bought QQQ (NASDAQ:QQQ) November 70 puts several weeks ago (note: I incorrectly identified these as October puts last week) when the QQQ was trading at $69.65. This morning, the QQQ opened below that level which, in a vacuum, would have gotten me back to the flatline from a P&L standpoint.

Not so fast, said the joker to the thief-any time you own an option, there is 24/7 time decay-or theta, in Greek parlance-which is (literally) the price you pay to own an option (for more on option basics, check out this six-part series by one of the best derivative minds that ever lived).

As such, while the initial downdraft helped my oh-by-the-way position, it wasn't an outright win. As my pal Swiper would say to Ms. Dora, who is ever-present in our home, "Aw, man!"

What I would like to do, if the price action allows, is get the theta gun away from my head and "roll" my downside exposure out from November to an expiration date well after the elections (volatility, as a whole, are still quite low).

I know, I know, politics and free-markets have nothing to do with each other, right? You would be correct, friend--if only the markets were truly free.

Random Thoughts:
  • Contributing to this morning's weakness are a three dynamics:
    • Apple (NASDAQ:AAPL) sold five million iPhone 5 units, well below the whispers of 8-10 million units.
    • Germany is losing patience with Spain and the EU warned that crisis measures are fading, according to Bloomberg.
    • Through the lens of supply-demand, fund managers aren't positioned for a decline after months of percolating performance anxiety (quarter-end is at the end of this week; watch T-3 settlement, or Wednesday, for signs of real slippage).
  • The bulls will point to the tape working off the overbought condition as a function of time rather than price. The bears will note that the VXO (^VXO) is below Bar Mitzvah levels, which is where it has bounced-and stocks have retreated-in the past, per the chart below.
  • Pavlov's bulls have been conditioned to buy each and every dip since the summer. That mindset is ingrained in the masses and we're seeing signs of it again this morning (note Google (NASDAQ:GOOG) (up on the day) and Apple which is halved its losses). Considering that these two tech giants are THE proxies for performance anxiety, we would be wise to keep our eyes on them as road-signs to start the week.
  • The cyclical stocks (Alcoa (NYSE:AA), Dow Chemical (NYSE:DOW), Dupont (NYSE:DD), Caterpillar (NYSE:CAT) Deere (NYSE:DE)) were pretty in pink on Friday and that's continued on the other side of the weekend.
  • Remember when tech was the new paradigm? When China was the global panacea? The real estate flippage? The parabolic frolic in crude? (If not, see our Bubble Comparison Chart here.)
  • I've been thinking about that a lot of late; perhaps because a) I wish I could chart the collective confidence in The Federal Reserve and b) in the back of my mind, I can't help wonder if the Fed will play it again, Uncle Sam.
  • If your firm would like to sponsor Festivus 2012 and give back to the kids-it's a write-off!-please let us know. The sponsor banners will appear on every Minyanville article from here to there, as well as registration and signage at the event. Plus, it's a GREAT event that celebrates the journey with our community!

Twitter: @todd_harrison

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