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Market Wrap

Do you think Greenspan's call options were about to expire worthless?

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MARKET WRAP
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        10-15-98         High     Low     Volume   Advances Decline
DOW     8299.36 +330.58 8347.76  7920.12  729,037k  1,296   1,759
Nasdaq  1611.01 + 70.04 1611.35  1539.45  664,763k  1,475   2,518 
S&P-100  514.18 + 22.41  517.41   489.64   Totals   2,771   4,277
S&P-500 1047.49 + 41.96 1053.09  1000.12            39.3%   60.7%
$RUT     334.81 +  9.83  334.95   324.98
$TRAN   2664.28 +172.54 2666.33  2478.72
VIX       35.95 -  5.36   42.54    34.06
Put/Call Ratio      .74
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Do you think Greenspan's call options were about to expire worthless?


Whatever the reason, THANK YOU MR. G !! BUT, don't start counting 
your money unless you sold at the height of the rate cut euphoria 
this afternoon. 

The Fed did the "expected/unexpected" (choose your word) today and 
cut rates between FOMC meetings. The last time the rate was cut
between meetings was Sept 1992. The last rate rise was in Apr 1994.
You can see this is not normal.

Investors, who had been looking for a reason to buy stocks, suddenly
found one. All of a sudden the rate cut fairy had blessed the bull
and the market was flooded with buy orders. 

Prior to the cut at 3:15 ET it was looking bad for the market. We
had been up all day but three times we had bounced off 8100 and the
last time was fairly strong. The market was at +82 and dropping fast
with NYSE ticks at -317 and Dow ticks -17. We had finally rolled over
for the day and I had just told someone I thought we could actually
finish negative for the day. Several of the stocks I watch had already
receded a couple of dollars from their intraday highs and were ticking
down. At the announcement the S&P futures, which had been declining,
spiked +52 points within 5 minutes before falling back to meet the
market. Today was the third biggest point gain in history for the Dow.

We have been range bound for the last few weeks between 7500 and 8100
with 8100 strong resistance. We looked doomed to another drop. Puts
were beginning to accumulate on the OEX and pent up call optimism
was an incredible 15:1 on the Oct-520 strike. This loading would have
prevented any rally to 520 on the OEX this week. 

The announcement created such a wave of buying that the resistance 
at 8100 was simply overpowered. Shorts were caught off guard and 
buying to cover as well as BTC stops were hit across the board. 

Rumors of another cut had been circulating since Friday. Hedge funds
had been closing their short positions at huge losses all week on the
basis of the rumors. The rumor, although largely ridiculed by analysts
from every sector, just would not die. 

In spite of the fun we poke at Greenspan, he is very smart, shrewd
and dangerous. If he wanted to cut rates with a larger drop at the
last meeting, but knew that there were some problems (hedge funds)in
the system, then what a crafty way to give the problems a way out 
that would not wreck the system entirely.  You know he was aware of
the internals of the LTCM problem before it happened and of other
funds in trouble that we have not heard about yet.

Imagine this: He lowers the rate at the meeting. This sends a signal
to everyone short that things are changing economically and they 
better start winding down their positions. Then a week later you 
float a rumor (they do this all the time) that they had a conference
call to cut again. Another warning to cover. Then this week you
float another rumor that rates will be cut before the next session.
A third warning. Funds have now had two weeks and three warnings to
clean up loose positions. Market trackers said there was significant
unwinding of positions this week. Now, if your Mr G. when would be
a good time to spring the trap to get the maximum world/market focus? 
Do you think Mr G. knew that tomorrow was expiration Friday. Do 
you think he knew that short interest was growing? Do you think
the budget deal today that included IMF funding was on his mind?
Of course to all the above. He is very crafty. An announcement
before/after market hours would not have had the same impact. An
announcement early in the day would have given the market time to
sell off on profit taking and rationalism in the afternoon. The
announcement was carefully timed, both as to day and hour to provide
maximum boost worldwide. By having the market close up strongly he
has now rocked the world markets as well. You can bet the overseas
indexes will be strongly positive tonight to close the week. GOOD
PLAN, MR G. !

Even though this bubble today was carefully crafted and very
overdone we do expect this to give the market a positive momentum
next week. Earnings are coming in strong with a lot of positive
announcements. The tech sector highlights have all been positive.
A couple of rotten apples but very small companies. The big boys
continue to lead the pack. 

The best scenario for tomorrow would be for a strong pop in the
morning to cause any remaining shorts and naked put sellers to be
forced to cover, thereby driving the market up even more. We think
it would take another +200 points to make this happen. If we hit
8500 anybody still short would run for cover. Expiration Friday
may make this number even lower, maybe 8400. The traders can't
afford to wait for prices to come back down since there is no
tomorrow on the October positions.

When you consider that we are +567 on the Dow and +191 on the 
Nasdaq in just the last five days, we are approaching over bought.
Sure another +200-300 would be nice but reality is there will be
profit taking Friday or Monday, period. 

Our Fearless Friday Forecast is a possible strong rally early 
followed by sell off in the afternoon. Very late in the day we 
COULD see some more buying as traders position themselves for a
positive week ahead. 

Plain English: Don't buy in the morning. Wait for a pullback
Friday afternoon or Monday/Tuesday. The market should correct 
before going higher again.

Remember: November option prices will be cheaper on Tuesday after
current month traders move into November positions on Monday. The
only case for buying November options before Tuesday is a stock
that is moving strongly and moves in big numbers, +$3-5 a day.
Options on slower movers will adjust downward Monday. 

The futures have been down as much as -2.00 and up +2.00. 
At 10:00 we are flat but will change as overseas markets respond
to our move. Plan you trades tonight while your mind is clear
of the emotion of trading. Tomorrow,  EXECUTE YOUR PLAN. 

Good Luck

Jim


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