Snapshot Notes - October 30, 2007

As of:

SPX 1511

Oftentimes these pre-Fed days will trade more like a pre-holiday, and today wasn't much different. Trading activity was lackadaisical, and we mostly just saw a slow drift lower in the major indices.

This morning we went over a modest warning sign, in the form of the International Securities Exchange (ISE) call/put ratio for equities only (excluding any trades done on indices or ETFs). Yesterday, that ratio hit 243%, which means that traders were buying 243 call options for every 100 put options. That's the most amount of bullish bets (relative to bearish ones) since the ISE began releasing this data at the beginning of 2006.

Since that time, the ratio has exceeded 225 on seven different occasions, and the five-day forward return in the S&P 500 after those was negative five times. Of the two times it was positive, the ten-day and one-month returns were negative. Which means that when we've seen these kinds of bullish bets in the recent past, the market declined over the short-term almost every time, and the couple of times it didn't, the gains were unsustainable.

Combined with some other indications of short-term overbought conditions heading into today, things didn't seem so rosy in the short-term, though those trying to capitalize on those negatives are battling what has been very consistent positive seasonality during this time of the year. That makes for choppy trading, and we're likely not going to see much different heading into tomorrow afternoon's FOMC statement. Typically we get a moderate upside drift into the rate announcement, then two or three violent whipsaws in the hour afterwards, then a more trending move into the close. If there is an extreme reaction, then that often gets reversed in the days following.

So the relative calm of the past couple of days has a good probability of being upset tomorrow afternoon, and I'm not taking any positions ahead of it. We have what looks to be a neutral- to negative-tilting setup in the short-term (other than seasonality), but these rate decisions can supersede anything else we look at. Bottom line, I'm sitting back and waiting for the post-Fed violence to pass before risking any capital.

As of:

SPX 1511

HELP ARCHIVE

Good Tuesday morning...we begin the day with a modest negative reaction in the broader indices and mostly negative sector action.

A few weeks ago, I wrote about small options traders and how they were putting on their most aggressively bullish bets since November 2000. During the next week, the S&P 500 promptly fell 4%, but in spite of that we haven't seen a whole lot of let-up in how these traders are positioning themselves.

That data only comes out weekly, so we have to rely on other figures during the week. Yesterday, one of the intra-week readings we monitor spiked to an extreme as well. The International Securities Exchange (ISE) publishes call/put data for indices and stocks, and we post several of their ratios on the site. One figure they recently began releasing is their call/put index for equities only (excluding any trades done on indices or ETFs).

Yesterday, that ratio hit 243%, which means that traders were buying 243 call options for every 100 put options. That's a lot of bullish bets - in fact, it's the highest amount since the ISE began releasing this data at the beginning of 2006.

Since then, the ratio has exceeded 225 on seven different occasions, and the five-day forward return in the S&P 500 after those was negative five times. Of the two times it was positive, the ten-day and one-month returns were negative. Which means that when we've seen these kinds of bullish bets in the recent past, the market declined over the short-term almost every time, and the couple of times it didn't, the gains were unsustainable.

That's a red flag for our current situation, among a few others we've pointed out over the past couple of weeks. For the short-term, we remain in a period of positive seasonality through the first few days of November, though of course tomorrow's FOMC announcement could have a big impact on that. In contrast to that positive, we have an overbought market at the moment, at least according to our STEM.MR Model, and yesterday's tight range is also a moderate negative. Given those cross-currents, and the looming FOMC meeting, I'm not doing much here trading-wise, and won't until we get past the likely whipsaws after tomorrow afternoon's rate announcement.

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