This Rally Feels Tenuous. Buy Puts If the SPY Trades Below $138.30. Market Does Not Trust DC

November 13, 2012
Author: Peter Stolcers, Founder of OneOption

The market is fluttering back and forth as it waits for news. All eyes are on Washington DC. The President is meeting with labor leaders, business leaders and key members of Congress this week. The rhetoric has been decent so far and politicians know what is at stake. The first sign of trouble will lead to a market selloff. This morning, the SPY briefly fell below the 200-day moving average. It quickly snapped back and that was a small victory for bulls. If this support level fails, we will see another wave of selling. Even if politicians are able to find middle ground, taxes will go up and spending will be cut. It might not be to the magnitude of the fiscal cliff, but it will impact economic activity. Corporations have been slow to hire and Challenger Gray & Christmas reported that planned corporate layoffs are on the rise. Companies don't know how Obamacare will impact them and they are not adding to payrolls. Demand has also been soft and there is no need to add warm bodies. Earnings guidance for Q4 has been dismal for most of the S&P 500. European credit concerns remain subdued. However, the ECB and the IMF are not seeing eye-to-eye. The IMF wants ECB to take haircuts on its Greek bonds and ECB does not want to. The next bailout payment to Greece hangs in limbo while they battle it out. They will get their payment, but it will come down to the wire. Spain has not formally requested aid and that could also be an issue. We will have a dose of economic releases this week. Conditions will be stable and they should not have a major market impact. Retailers are posting mixed results. In general, the news has been soft and consumers are playing it safe. The rhetoric out of Washington DC is all that matters. The longer we go without any progress, the greater the probability of a selloff. I did not like the dip morning and I am buying back my put credit spreads for a small profit. I just don't like the risk exposure. If the SPY closes below $138, I will buy puts and I will add on weakness. If we stay above $138, I will keep my powder dry. Labor leaders and the President will get chummy today. Business leaders will have a different tone. I suggest buying back put credit spreads. Follow my lead and by puts if the market trades below SPY $138.30. This snapback rally feels weak and I believe we will see selling late in the day. . . image

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