Just a quick note: as I predicted last night, indices look short term overbought. The Dow and the SPY ended down today after a big rally in the morning. IWM had a good day, although this is partly catchup after it diverged from the other major indices earlier in the month.

We’re looking for the SPY to drop back under 153, and it if does we may exit our June SPY trade sometime next week.

Yesterday was an interesting day in the markets: an early rally on no real news tapered off, and volume wasn’t strong enough to indicate any really serious buying interest. It may be that the slower summer trading season has already begun, but either way we should get an indication today or tomorrow of whether the spring megarally really is dead.

Update: as of 7:30, futures are pointing to a major lower open, presumably in response to China’s tripling of the “stamp tax” on stock trades. The emini S&P 500 futures are down 8, the Russell 2000 emini is down 5.10, and the Dow emini is down 71.

The great thing about market-neutral positions is: down moves like today’s will be great for our positions!

Well, if you didn’t get a chance to watch the markets today, it was a classic selloff. The Dow closed down 84 points, the Nasdaq down 39, the S&P500 down almost 15.

Needless to say, this was a big relief for our SPY position. Just yesterday our short 153 call was briefly violated, and more than a couple of you were nervously asking whether we should exit. In fact, some bloggers and people in the financial media were saying silly things that would make you think we were never going to have another down day!

Of course, it finally came. And with the SPY just barely above 151 now, we have a good deal more breathing room. As long as markets don’t find some excuse to bounce back hard with renewed vigor this week, some nice market churn should help us capture more time decay (theta) and solidify our winning positions.

The IWM trade is also in good shape, although if the small caps don’t start showing some general strength, our put spread could get threatened before July expiration. IWM and RUT have been seriously lagging the large cap indices for some time now, but we would point out that much of the Dow upside has been generated by merger and acquisition announcements, i.e. event-driven movement that may give large caps a temporary boost but won’t allow any long-term index divergence.

Last thing to note: early this morning, I heard on the radio that “markets were having a good day, with the Dow up 4 points on good housing news.” Now, after the close, there are stories that take the same event - “good housing news” - and use it to explain the big down day (good housing news = no interest rate cut necessary = bad for markets).

It’s funny how the financial media will twist any data point you give them into a supposed explanation for how the markets move.

Just to let you know, we’ve added a new Portfolio page to our site. In case you ever lose an email or forget which trades we have opened or closed, just check there to get a quick overview of our positions. You can access the page under the “Members Only” section in the sidebar of our site.

As always, if you have any questions, feel free to shoot us an email.

Last time, we asked whether the recent trend has seriously been broken. Only a few days later, it doesn’t appear so. As you can see from the chart below:

• the SPY is back to hugging the upper limits of its Bollinger Bands
• the On Balance Volume reading we were wondering about before has only pushed higher
• and the ADX gives no signals that we’re entering a range-bound market.

That means we’re still in an environment that is a bit more dangerous for market-neutral traders like us. But it also means that if we get a significant correction of the next couple weeks, we should be well poised to profit while others (you know, the permabull longs you see on TV every day) take the hit. The basis of our entire strategy, remember, is to stay well hedged, take in income over time, and reduce our risk.