The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.
William Arthur Ward

The COT index number on the SPY comes in this week at +24.2%. Last week we saw buying support on the index at that $160 level that has been bandied about across all manner of financial blogs, and the COT number was +20.6%.

Have the COT traders got back on side? I think that they have. However I remain a little cautious, and have been looking for confirmation within some other markets.

The first market that I checked, especially in that Bernanke and the Federal Reserve are due to make comments next week, was the Fed Funds Futures. They are forecasting essentially nothing to change into December 2013. However, they are forecasting a bigger change into September 2014 with a rise in Fed Funds by 10 basis points from an average of about 2 basis points recently.

For the moment then, I am seeing essentially confirmation for the moment that the COT traders have got back on track.

The second market I checked was the Options market. Put/Call ratio specifically. Here the message is contrary to the previous two. The ratio is indicating that the current correction continues.

Given that we don’t actually know what Bernanke is going to say, all of the above is the ‘market’s’ best guess. As such, until clarity [if there is such a beast] from Bernanke, I will remain market neutral with regard to all positions.

The backdrop, the economy, remains stagnant. If profitability was returning, then businesses would be borrowing to invest and increase production. Companies are maintaining, or reducing margin compression through cost cutting, not increasing revenues. Thus the low rates are not producing any uptake, save for companies that are taking on debt to buy back common stock, viz, the cost of debt capital is cheaper than equity capital. Therefore unemployment will remain stagnant.

Given that Bernanke made a commitment to the market to maintain QE stimulus until unemployment fell to 6.5%, and currently is off that number, you would expect QE to remain.

Bernanke and the IMF have indicated that monetary policy alone is not sufficient. That fiscal policy must also be expansionary, viz, running larger deficits. Politically that is a question mark with regard to popularity etc. Essentially…wait and see.

In summary, I advise remaining market neutral until this current period gives way to some form of consensus in indicators and price action. Market neutral allows you to profit in either direction, so you lose nothing.

Here then is a potential candidate.

Greeks / NBBO

Symbol Bid Ask IV Delta Gamma Vega Theta
HRS Nov13
45 Call 5.70 6.30 25.92 -74.89 -3.84 -10.20 0.95
HRS Nov13
45 Put 1.15 1.45 25.32 -49.47 7.79 20.23 -1.60
HRS Nov13
50 Call 2.60 2.90 22.75 102.17 10.95 25.54 -2.02
HRS Nov13
50 Put 3.00 3.30 23.22 48.82 -5.36 -12.77 0.89
Net 26.63 9.54 22.80 -1.78
NBBO 0.00 2.10

Entered Trade

Sell -1 HRS Nov13 45 Call $0.00 $0.00
Buy 2 HRS Nov13 45 Put $0.00 $0.00
Buy 2 HRS Nov13 50 Call $0.00 $0.00
Sell -1 HRS Nov13 50 Put $0.00 $0.00

Current Price:
Price Profit / Loss ROM %
33.75 $625.00 125.00%
39.27 $73.20 14.64%
40.00 $0.00 0.00%
45.00 ($500.00) -100.00%
45.08 ($500.00) -100.00%
50.00 ($500.00) -100.00%
50.88 ($411.60) -82.32%
55.00 $0.00 0.00%
56.69 $169.20 33.84%
62.50 $750.00 150.00%

Until next week,
jog on