A correction sooner than later

The market has been on a slow, monotonous grind higher lately after a roaring tear the past few months. A lot of the economic data has been negative, which the bulls spin in their favor. Their argument is that a weak economy will spur the Fed to cut rates, and that will be good for stocks. Well, that goes counter-intuitive to their previous war-cry, strong earnings. If companies are truly undervalued and people are buying because P/E’s are so low, what’s going to happen when the E (earnings) goes down? Yes, stocks will get expensive and people will sell. Personally, I think that the whole interest rate cutting thing is the stupidest argument in the world. Sadly, I don’t run a $5 billion portfolio. If I did, I’d be largely in cash or defensive plays right now and selling the hell out of some VIX 12 & 13 puts .

Speaking of the VIX, anyone notice that "13 is the new 10?" Yep, skittishness is running high on the street. The SPX can rally 10 points higher, and the VIX will only drop 10 or 20 cents. The SPX goes down 2 or 3 points and the VIX jumps a buck. Smart money is smelling a drop in the future. It will probably start in Asia, just like on 2/27 of this year. Did you know that 4.8 million trading accounts were opened in China last month? Yeah, a bit excessive even with all of the people they have. Their market is up over 50% YTD (after exploding upwards over the past 3 years) and people are quitting their good, high paying jobs to trade the market full-time. Sound familiar? Oh, and you cannot short stocks in China. Bubble? You bet. What happens to bubbles? They pop and it always ends badly for the little guy.

So what am I going to do, short the market? Hell no. I may not be a raving bull wearing rose-colored glasses, but I’m not a masochist. Remember that the market can remain irrational longer than you can remain financially solvent. I’m going with the defensive stuff and selling puts against the VIX. If we do have a break (and I mean a real break), I’ll start putting on some more bearish plays like selling call verticals but nothing overly bearish (like buying puts outright).

Oh and the best reason for a selloff? Nobody thinks it will happen. Every newscast or financial article I read has everyone bullish and stating that we’ll grind higher. From one article,  "but
it doesn’t seem like we’re going to have a correction anytime soon." That right there is reason alone to sell — complacency.


About diqster

r to the hizzle
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