One thing to remember during big market swings like this is that the probability that an underlying will touch a particular OTM option strike is always higher than the probability that that option will expire in the money. In other words, the odds of an underlying pushing up against your breakeven point (assuming you’re selling OTM credit spreads) will always be higher than the odds that you’ll have a losing trade. So if you jump ship every time the waters get a bit choppy, well, that’s a really easy way to drown.
Sentiment in the media and the blogosphere seems to have shifted bullish, as everyone seems to be convinced that the double bottom is in and happy days are here again. (Barry notes some of the bottom-callers.) We’re not so sure that a couple of news-driven rallies and a Fed gift to JPM is enough to dispel all the troubles that we were all so concerned about in January and February.
We may add another April position to take advantage of this bullish movement since last week; however, we also want to see some confirmation - so on the SPX, we’d like to see a move up to the 1380-1390 level. Although the rally today showed stronger internals than the action we saw last week, there are reasons to be cautious:
- We are in a recession.
- The housing data released today shouldn’t have been party-inducing. As Calculated Risk notes, your dancing shoes really should stay in the closet until at least the March existing home sales numbers are released.
- Major indexes are quickly approaching short term overbought status, as measured by RSI(2). DIA, SPY, QQQQ, and IWM are all showing readings near or above 90.
- Nice fib retracement today to the 38% level - see SPX, for example.
- All of the volatility indexes (VIX RVX VXD QQV VXV) at or below their 50MAs.
- The financials, which have been so key to the market action recently, are also short term overbought and may have put in a topping tail today. See GS chart at right, though the same basic story is playing out in C MER LEH JPM et al.
- Volume today? Decidedly uninspiring.
