Member Log In | Help | Contact Us
Home Page First Month for $1 Free Investor Perks Signup Site of the Week

Déjà Vu in 2005?

Bernie Schaeffer
Bernie Schaeffer
Get Bernie Schaeffer's FREE 2005 Market Forecast. See what the top market timer predicts for the year ahead. Get outperforming sectors and hot stock picks!

Now that the support I was postulating in my November Option Advisor commentary (the 117 level and the 160-day moving average on the S&P Depositary Receipts [SPY]) has held and we've once again moved to the top of the trading range, let's look at yet another déjà vu in the form of the price action of the S&P 500 Index (SPX) this year and in 2004 as illustrated in the accompanying two charts. Note the May and October bottoms in both years and in particular the vertical liftoffs from the October lows. (As an aside, if you were to flip over the price action in July and August 2004 using the 1,120 level as a "fulcrum" so that the August low became an August high, the broad shapes of the 2004 and 2005 markets would be identical.)

So will we also do a repeat of 2004 by breaking out from the top of the range and rallying into year-end? One factor that is supportive of this scenario is the open interest configuration of the options on the SPX (see chart below).

Note the huge put open interest in the December series at the 1,200 strike (155,000 contracts) and below (83,000 at 1,175 and 160,000 at 1,150, to name a couple), all the way down to the 500 strike. My feeling is that these puts were buyer-initiated, as stock and futures players sought to protect their long positions with index puts. If that's the case and as we approach December expiration and these puts continue to trade significantly out of the money and the odds of them expiring with no value soars, the hedged short positions (mostly in the S&P futures) of those who sold these puts will continue to be covered at an accelerating rate. This short covering would provide fuel for further gains in the market, and operate as a "virtuous circle" as rallies beget more short covering that begets more rallies.

And what of the "cold, grey market" about which I warned last month - the one that could break "so hard as to be beyond the imagination of any who have not experienced live markets like that of 1987?" The "complacency twice over" I lamented is still with us, particularly as it relates to the mega-cap blue chips in general and the mega-cap techs in particular (note this issue's put trades in the Aggressive Portfolio). This has been an extremely difficult market for me to forecast, as it is one whose most likely immediate path due to various structural factors has been consistently to the upside and yet one that is unusually vulnerable to a crack-up (in part due to these same structural factors that grind it higher). Since no such crack-up has occurred, the most charitable thing you could say about much of my remarks over many months now is that they are worthy of a movie now showing at a theater near you - "Chicken Little." So go out and have your fun and play selectively from the long side outside the realm of the "usual suspect" blue chips, but I strongly recommend against you being 100-percent invested without put protection.

Bernie Schaeffer will be available to take your questions until Monday, December 5. Please use the form below to submit your questions.

eMail Address: 
Recent Analyst Articles:
02/07/'s Alan Farley - As Happy Talk Fades, Bleaker Picture Emerges
01/31/'s Bernie Schaeffer - Watching the Retail Sector
01/31/'s Neil George - How We See It
01/31/'s Tom Ventresca - Putting It All Together
01/24/'s Chris Lahiji - Small Cap Play Alert: New Frontier (NOOF)
01/24/'s Price Headley - Off Shore Investing
01/24/'s Steven Smith - That Tempting Volatility

Wall Street Secrets Plus Archive of Analyst Articles...