Option Put positions begin to come to fruition as FTSE finally breaks…

Regular readers will be aware that we have been taking capital off the table in the last couple of weeks and reducing positions. A short position was in fact incepted on the FTSE at 6270 although this was only small. We prefer to play a correction via the options market – particularly with volatility so low and so we are buying up “cheap” 6225 Feb Puts and March & April Puts on spikes with a view to selling Puts at lower levels on the same month on the first real shake out to get us into a calendar spread for free. UPDATE – WE HAVE MANAGED TO GET INTO A 6225 FEB – 6075 PUT SPREAD FOR A 10P DEBIT – 14 TIMES UPSIDE WITH 10P DOWNSIDE – WE LIKE THOSE ODDS!

The guide below fleshes out in depth just why this bull market has likely further to run based on historical precedent but a few issues were additionally rattling around my head this weekend & that has prompted me to “put finger to keypad” – 

1. All the expectation that is around (including ourselves) for a correction is tempering somewhat the “extreme” bullish sentiment figures that some commentators are putting out (in particular Zerohedge) – a real correction rarely comes when a lot of collective participants actually are not positioned for continuation moves to the upside and my impression is they are not.

2. I recall the 1999/200 dotcom bubble in which I personally lost a serious sum – global markets were heavily overbought and yet they continued rising. I get the sneaking suspicion that we have yet to see a proper squeeze up yet and that the slow day after day grind higher that we are seeing is serving only to pull in fresh short money and so fuel for the final ‘squeeze’…

3. Anybody who can read charts cannot say otherwise than pretty much all the major global markets are in classic bull trends with flag breakouts to the upside and steadily trending higher moving averages. In fact, on the weekly and monthly basis, the markets do not look overbought.

To wrap up – anybody who is aggressively shorting should look at the wider picture and not snapshot headlines of extreme bullishness etc. It’s almost as if everyone’s ‘willing’ the market to go lower and as we all know – the market ALWAYS confounds.

All sectors in the UK are now performing very well too. The number of sectors trading above their 200 day moving averages is now up at 29 (from 26 last month). Interestingly, there are no sectors trading below a falling 200 day moving average – that is a very powerful signal… 

The all-time highs are not far away now too for the key markets. The Dow Jones Industrial Average is just over 1% away, the S&P 500 is around 4% away and the German DAX is 4% away. My guess is that the “magnet” effect of these levels is too powerful for the indices not to attempt at least a poke through…

Below is a chart that shows the NAIIM bull/bear sentiment over the last 2 years and I have highlighted those levels similar to what we currently have. I say similarly as we have not yet reached the same nadirs in bear sentiment although we are near a peak on the bull sentiment side. It is not particularly clear in the chart but the extremes generally lag the market by 3-4 weeks and again this fits with the “blow off” yet to come.

We are happy to continue to profit take and steadily build option Put positions with small portions of the profit. Today top sliced Lonmin further (thank you SocGen for your bear call that seems to have sucked in some hedge funds and no doubt contributed to the 25% rise seen in the last 3 days of last week. Give that man a cigar!)