Sell Out of the Money Puts and VXX – Bid Is Tenuous But Support Will Form This Week

Posted 9:45 AM ET - Yesterday, the market pulled back to a major horizontal support level at SPY $192. Asset Managers are not buying and they want to gauge the selling pressure. Once support is established, they will step up to the plate. They do not want to miss a year-end rally and many are anxious to buy this dip. China's flash PMI came in at 47. That was below estimates, but dismal results were expected. This is the lowest level since 2009. The PBOC will do all it can to stem the tide. We can expect continued weakness in China. Their economy is growing at an unsustainable rate of 7% and it will continue to drift lower. There are not currently any credit concerns and I don't believe we will see any this year. The Fed remains dovish and this is "market friendly". I don't believe we will see a rate hike until March. The “Yellen put” is firmly intact and that will prevent a sustained market decline the remainder of the year. There are a few more weeks of seasonal weakness that we need to get through. Once the market bid firms up, stocks will march higher. I am not looking for a massive rally, just a gradual move up. Bond yields are near historic lows and stocks are attractive. Money has to flow somewhere and equities are the best game in town. In the last 10 years 50% of the shares outstanding have been retired. Corporate buybacks remain at record levels. More money chasing fewer shares results in higher prices. This is a very powerful force and barring a credit crisis, stocks will move higher. I am selling out of the money put credit spreads on strong stocks. I can distance myself from the action and I can take advantage of time/implied volatility decay. I am also shorting the VXX/VIX. Option implied volatilities will decline now that the Fed's intentions are known. Sell puts and sell VXX/VIX. Know that the bid is tenuous and you might take a little heat along the way. Support will be established this week and we should grind higher next week. . .

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