Are The Widows And Orphans In Yet?

…and with the SPX reaching both the high-end of this uptrend channel and overhead resistance, and the volatility hitting rock bottom, one might think that a pullback at least to the lower end of the uptrend channel might be in the offing.

But any real sell off – that is, something in the 10% range or more probably isn’t going to happen until everyone is convinced that the Fed is really making headway.

Art Cashin of UBS writes that “Traders (both here and Chicago) think [the Fed's next move] may be an aggressive Operation Twist in mortgage backed securities (the original source of the problem).” ”The goal would be to drive margin rates to dramatic lower levels not seen in history.”

Not just to help jumpstart the housing market by making refinancing an absolute no-brainer as Mr. Cashin points out, but to also spark the economy which has failed to fire-up despite three rounds of quantitative easing. Since last October the dollar has risen approximately 10.7% to 83 from 75.

That’s not good for a struggling economy and the data are bearing out the reality that QE’s 1 & 2, and Operation Twist – while perhaps keeping the economy from completely stalling – have done little else to spur economic growth.

If you’ve ever heard the saying “The Transports never lie”, then take a look at this chart. And if you haven’t heard that saying, what it basically means is that the Dow Jones Transportation (DJT) index leads the market. If it is going up, so is the rest of the market and vice-versa.

Does a rising dollar and falling transportation index spell trouble? I would say yes. But when does the market see this?

One tenet of trading says that a market will drop when there are no more buyers to support the market. Perhaps the Fed’s actions in the coming weeks and at Jackson Hole will finally provide enough impetus for all of those that have not yet piled on to this rally to finally jump in. And who would this be? Retail traders. The little guy that is always late to the party and is left with the bill. And the most novice of these retail traders/investors of course being the widows and orphans (those, that I learned in a law school securities course, who are in most need of protection from the wolves on Wall Street). Ironic that securities laws are designed to level the playing field, but the market itself is far from level.

We’ll see if there is any real reaction to what Bernanke & Co. might do, but any pullback over the next couple weeks (down to the uptrend line in the above chart) might present a bullish opportunity to ride the (last) wave higher as the meekest of sheep are herded into the slaughterhouse. And once the smart money have offloaded their holdings on said rally once again into John Q. Public’s 401(k), then and only then will we see a real selloff.

In the meantime, with the volatility getting so incredibly cheap (look at GLD, VIX, TLT for instance), I’ve entered some long-volatility plays into the Options Buzz model portfolios. These can be viewed as relatively safe plays as long as the volatility doesn’t decrease substantially more, which I don’t think will happen. But I’d also be looking to adjust these where necessary, either to take advantage of any market movement, or to decrease the time decay risk.

Submitted by Greg Loehr Options Buzz