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February 2, 2012

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Traders on hold, non-farm on tap

While scouring the headlines of business news websites and ran across a few that included the text "time to buy stocks".  I always find it interesting that the equity markets are the only place where people look to buy things after they have become more expensive.  If you went to a hardware store and discovered that it cost 15% more than it did at the end of November, you would probably be apt to forgo the purchase and wait for a sale.  Yet, when stocks are on the rise investors clamor to chase them higher.  For buy and holders (with EXTREMELY) long time horizons, this might be a strategy that works out, but for those trading on leverage, timing is everything. 

As contrarians, we tend to want to be the opposite of others are compelled to do.  Simply, we like the idea of buying things when they are cheap and selling them when they are expensive.  This is the type of thing that sounds great on paper, but isn't always as easy to implement.  Nonetheless, current equity market pricing doesn't seem to be a screaming deal.  Instead, buyers at this level run a probable risk of being forced to withstand the pain of a correction before being rewarded. 

We'll be the first to admit that the current rally has extended beyond our original expectations, but that doesn't mean it is time to buy.  In fact, it is time for the bulls to be more cautious.  With the VIX now well under 20, the financial markets appear to be "due" for an increase in volatility and that would most likely mean corrective action in equities.  According to the Consensus Bullish Sentiment, about 71% of market participants are bullish; likewise, only 18.9% of those surveyed for the AAII Index are bearish.  Although markets can stay overbought and irrational longer than many of us can stay solvent, these sentiment readings are vigorously waiving red flags. 

We don't advocate jumping in front of the freight train, but it could be worthwhile to have some long lottery ticket puts under the market (NASDAQ puts are particularly cheap).  We like anything with a strike of 2350 or lower in the March options.  You might also want to consider an option spread in which risk is shifted away from immediate prices to provide room for error.   For instance,  you should be able to buy the March e-mini S&P 1300 put, sell the 1250 put and the 1370 call for a total cash outlay of about $100.  The risk is unlimited above 1370, but the trade profits as much as 50 handles $2500 if the futures price is below 1250 at expiration. 

We could see a spike high before rolling over on tomorrow's employment report.  Look for resistance in the S&P near 1333 and then again near 1339...these are the levels that bears might want to consider playing the downside from.  In the meantime, intraday support lies at 1315 (soft), 1307 and then again near 1299.

From a previous newsletter but you might find it interesting if you missed it.  Thus far the market isn't cooperating...but we haven't changed our mind:

Futures and Options Trading Recommendations

Position Trade -

1-18 We recommended that clients sell the March S&P 1370 calls for about $9.00 in premium or $450 per mini contract.

In other Markets...

 1-17 Clients were instructed to sell a March futures contract near 123'20 and to purchase a June 123.5 call option as insurance.  This trade offers limited risk and unlimited profit potential. 

(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more.  Email us for more information)

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.