Kaputt-ulated!

For the past month we have found ourselves in what I would call the ‘option trader’s graveyard’:

Unless you were holding iron condors of course – personally I never really acquired a taste for those. What lies ahead is the big unknown – a vast stretch of no-man’s land also referred to as low participation December. Yes, I know everyone expects a ‘Santa rally’ – sure – whatever – what everyone seems to somehow conveniently forgetting is that literally none of the usual ‘seasonals’ have been observed. It’s been ‘bullish all year’ basically and if you ‘walked away in May’ you missed out on a nice ramp up. If you sold in August/September then you got killed by more upside.

But that’s all history – where do we go from here? The wave count on the chart is more obligatory and based on what I would ‘expect’ to see. But I have to throw in that right now it’s prudent to ‘expect the unexpected’ – despite the fact we’ve been holding at the 1100 mark and have not given an inch to the bears it’s difficult to not recognize the level of complacency that’s pervasive among traders/investors right now. The bears have given up completely and decided to go into hibernation:

Bulltards now outnumber beartards by a ratio of 3:1 – yes it’s been a very dark and cold year for the bears. This might not be a sheer loss of conviction – note that the bull count has been relatively stable at close to 50% for two months now. What’s been dropping steadily has been the number of bears. So, rather what’s probably going on is that the bears are going broke and are simply unable to continue shorting this market. Beartards have never been stupid as they can’t afford to be – the game is stacked against them plus they are always in the minority. So, if you’re a bear you better be smart or you will quickly become extinct. What usually bites a lot of bears in the ass is that they are too impatient and underestimate the market’s capacity to continue a rally based on raw human perception and wishful thinking. But when I look at sentiment indicators like the Investors Intelligence survey above then I can imagine that many bears now kick themselves and wish they had waited this long to dip into the put jar. But many of them are broke at this point and even if they wanted to are unable to short this market in a big way – so effectively they kaputt-ulated. Someone clever mentioned ‘caputulated’ in the comment section yesterday – I thought I’d double up on it by adding the German word ‘kaputt’ – I think both terms together very accurately describe the state of the bears right now.

Okay, now that you are sufficiently confused – what to do? Well, if I was a bear (which I am) and still had some coin left (which I do) I would probably look at December as a complete tosser. At the same time anything could happen at any moment and since option premiums are at an all time low I would most likely bulk up on long term puts (i.e. March or June). January is a possibility but IMNSHO still a big risk. Look what they did to all those December gold put holders – those guys got killed. You don’t want to find yourself running out of theta just to watch the market tank right after – that’s the worst. So, if you want to stay short swallow your ego and shift into longer term puts. They will try to kill all December put holders – and thus far it’s working very well.

Now, if you insist on trading more short term then I would keep a eye on the CPCE and the 10-day MA. Seems like we’re pushing towards 0.65, which when touched might be good for a nice drop. Perhaps that’s when the whole house of cards will come crashing down but heck – that’s probably just my wishful thinking talking.

Cheers,

Mole