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Trading Lessons

QE2 Stock Market Warning, What if Nothing Happens?

Stock-Markets / Stock Markets 2010 Nov 03, 2010 - 11:40 AM GMT

By: Bob_Clark

Stock-Markets

Best Financial Markets Analysis ArticleWhat if nothing happens?
 
This is the most anticipated monetary event in a long time. Combine it with a big change in the political landscape and we have the potential for a blockbuster move, but which way and how  far.


There have been a lot of calls made in both directions, but what if nothing happens? What if the news comes out and over the next few weeks we go nowhere?

The option market is saying that it is a possibility.
 
The markets are at extremes and the public is clearly back in a buying mood and are loading up on the long side.  The markets have gone nowhere in weeks as the public piles in and the Fat Boys sell to them. The following two charts clearly show a strong bully bias among the small traders and investors. It has been my experience that the poorly run pension and hedge funds tend to be in the same camp as the public.  Everybody knows that the public never wins when they buy at these extreme prices and sentiment readings. 
 
 
 
A Lot of bull 
We are at AAII sentiment levels that have been seen at tops ever since we made the high back in 2007. 

The investment letter writing Gurus are leaning toward the bull side as well. As you see in the chart below, they are not as bullish as they were in April but they are leaning more to the bull camp and there are not many bears around.

We have gone nowhere in two weeks, indicating someone is selling here and the sentiment charts say it isn't the public.
 
 
 
Seems like a slam dunk short, but wait

Look at what seems to be happening in the lower chart. The public seems to be hedging their high risk, long positions.  Somebody is buying a large amount of put options, which can be insurance against a decline in their stock price.  The public usually do not sell naked put options.  They buy them.
 
Notice something different about this chart?  We are approaching (we are not at an extreme) levels that are usually seen at market bottoms, not tops.  The put/call ratio shows an imbalance of put buying.  We have to ask who is buying all the puts here.  This is very unusual at a market top.  You will notice that the green line usually is high at bottoms and low at tops, it is just a tool and doesn't always work, but it is saying pay attention, things are not as they seem. 
 

 

More bull
We know that the government and the Federal reserve have a lot invested in this announcement and they don't want to see a big "sell the news" drop right after the data release.  In fact, I am guessing there is a deal with the fat boys to keep the markets up for awhile afterward, to help "sell the idea" that what they are doing is market friendly and a good thing for the economy.
 
The cyclical model calls for a trading cycle low right now as well.  So everything points to higher prices. 
 
Coincidence? 
It is strange how just when the Fat Boys need the public and the funds to buy puts where they don't normally buy them (which is on the highs, like now). There they are, right on time, creating larger than normal demand. Most unusual.
 
Maybe the public has it right this time, maybe buying put options is a brilliant insurance plan. 
Maybe the public have finally fooled the Fat Boys.  Then again, maybe not.
 
Summing up
The strange option imbalance just ahead of the Fed meeting may be giving the following hints.
Don't expect a huge "sell the news" drop.
Don't expect a huge ramp up either.  If they are puts for November (and I suspect that would be the public's choice), they expire on the third Friday of the month, which is the 19th.  That short a duration means there is not much meat on them (time premium), so if the FBs are short stock, there is not a lot of protection against higher prices.

Expect a rally that lasts a couple of weeks but doesn't go too far, followed by a sell off back down into this area as the puts reach expiry.
 
This way, after selling a lot of put options, the fat boys can take prices up for a while and still make money. At the same time they will fulfill any obligations they have to support the market after the big Wednesday event, keeping the government and the Fed happy.

Trading using conventional technical indicators  doesn't work, all you get is random results. The Fat Boys use them as traps.  Please take my course or get my videos and learn the ways of the Fat Boys.  If you are not with them, you are a victim. 

Bob Clark is a professional trader with over twenty years experience, he also provides real time online trading instruction, publishes a daily email trading advisory and maintains a web blog at www.winningtradingtactics.blogspot.com  his email is linesbot@gmail.com.

© 2010 Copyright Bob Clark - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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