Securities Research Services

Friday, June 15, 2007

Volitile Week Punctuated by Options Expiration

The market does a good job at frustrating the most people most of the time. Lately, this includes everyone who has longer than a trading strategy with a time frame longer than one day.

This week has seen the market make a hard whip saw, which is fine, the market sometimes does lean hard one way only to reverse and stop out traders. Oftentimes these types of turn around events are good buy signals.

The trouble here, is that this current buy signal is just so hard to trust. The market seems to get rocked by one piece of data one day, only to react equally as violently to a seemingly contradictory piece of data the next day. It's a market that can't make up its mind. Moreover, it's very hard to overlook the fact that indices are very extended and the heavy distribution days we have experienced of late.

In fact, the rally over the past two days looks to us to be a selling opportunity for smart money, or a distribution rally. And, since today is options expiration day, it's possible that the rally over the past two days served merely as a chance for options sellers to collect their fees on all the put contracts they sold last week when the market was in a panic slide.

We continue to believe that the short side offers the path of least resistance in the intermediate term. Near term, however, things are just not very clear. Timing is everything and it's difficult to say when sellers will take control of the market again. The best thing to do when the picture is so unclear is to lighten up the load and raise some cash. To be sure, we will be happy to put this options week behind us.

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