Ever since we ran an article last fall on selling weekly options, subscribers have been clamoring for (okay, well maybe not “clamoring,” but several have requested) an article on weekly calendar spreads. Of course, in that previous article, we promised a future article on weekly calendar spreads. So the time has arrived to try to tackle what is a far more complex subject than merely selling weekly puts. The calendar spread subject is complex because there are myriads of ways it can be approached – put calendars or call calendars?
On Friday, May 6th, the total put-call ratio (ALL options traded) was above 1.00. That is quite unusual, and when it occurs during a declining market phase, it is normally a strong buy signal. The last time this happened was March 15th and 16th. The market then rallied from 1256 to 1335 over the next month. There are nuances to this, of course, which will be discussed in our newsletters, but this is usually a sign that "too many" people have become bearish and -- by contrarian analysis -- the market should be bought.
$SPX has pulled back to the critical support area at 1330-1340. It's one thing to say that an overbought market might have such a correction, but it's quite another to experience one. If $SPX closes below 1330, that would turn the chart negative.
Nearly all the other indicators that we follow have already turned bearish, which makes things much more negative. Breadth indicators registered sell signals.
The equity-only put-call ratios have generated sell signals as well.
Coming soon as part of the Bloomberg Press Financial series is the latest book by Richard Lehman and Lawrence G. McMillan, Options in Volatile Markets 2nd Edition: Managing Volatility and Protecting against Catastrophic Risk. Below is the book cover and the write-up from the inside jacket cover. We will let everyone know when this book is available.
The Standard & Poor’s 500 Index and virtually every other major index broke out to new post-2008 highs (and some to new all-time highs) in the past few weeks. But as is always the case, the euphoria and momentum of buying produced some extremely overbought conditions. Those need to be worked off before the market can move higher, and thus a correction is at hand.
Once again, as we enter another earnings reporting season, we are seeing some large moves by individual stocks and perhaps even larger anticipation of moves by the option markets in advance of the earnings announcement. This was a topic of much discussion at the just-concluded 3 Gurus Webinar over the past two days. Because of that interest, we thought the subject is apropos as the feature article this week. In this article, we're going to review the strategies that are often recommended in this newsletter.
The market broke out to new 2011 highs this week. Some of these indices are actually making new all-time highs, having exceeded their 2007 peaks. The chart of $SPX now has a new bull market trend line, connecting the August and March lows. The breakout over the old highs in the 1340 area could measure targets to nearly 1400 on this move.
Equity-only put-call ratios have remained on buy signals for some time now.
Breadth has been strong of late, and both breadth indicators are in overbought territory.
The market has finally broken out to the upside — sort of. The Standard & Poor’s 500 Index finally made a new 2011 high, at last joining the Dow Jones Industrial Average, Value Line, Nasdaq 100, DJ Transports, DJ Utilities, Nasdaq Composite, and the NYSE Index, among others. The Russell 2000 is not quite at a new high, but it’s close.
After a severe scare on Monday, which I label the "Emperor has no clothes" decline, the market has responded well, due in large part to some positive earnings report. Now the problem -- if there is one -- is the resistance from the February and April tops in the 1340-1345 area. Another failure at this level would be quite bearish.
Equity-only put-call ratios have remained bullish, even with the selling that occurred last week.