Feeling nervous

All of a sudden, it's gotten a bit nervy, hasn't it? Yesterday's late-session swoon in the SPX wasn't particularly unique- we saw very similar price action last Wednesday- but it was still enough to illuminate a few amber warning lights on the market's mental dashboard.

What makes the market's nerves all the more understandable is that all but the doughtiest of risk-asset shorts has been carried out of positions; indeed, one of Macro Man's few remaining outright short risk positions was stopped out overnight. And the degree of complacency seems quite remarkable, given that we're still in the Greatest Financial Crisis Since the Depression TM . One bank reported a 19 year high in their risk appetite index yesterday; while Macro Man's is not at quite such an extreme, it is just off of 5 year highs, too long ago to feature on the chart below.
Similarly, VIX has been taken down a lot, and is much closer to its lows of late 2006 than it is to the recent highs. There was some discussion in the comments section of yesterday's post on how best to play this.
In that discussion, Macro Man suggested buying index puts, either naked or on a delta-hedged basis; not a breathtakingly new insight, to be sure, but sometimes the obvious trades are the best. Having given the matter some thought overnight, he has decided to dabble in puts on the FTSE. Not only does the index have a heavy concentration of miners, which one can only conclude are well-owned, but a recent piece of bank research suggests that the miners expensive relative to the stuff that they actually dig up. Throw in a high level of skew in the FTSE (which means that vols have come off a lot on the rally), and we have a winner. The icing on the cake is the fact that the FTSE has reached the edge of its Bollinger band; a retracement to the moving average pivot at 6112 would put Macro Man's little trade solidly in the money.
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11 comments

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Mickson
admin
May 20, 2008 at 12:32 PM ×

Been short for 6 weeks and hating it.
I sense my S&P 500 short and long VIX are about to pay up.
At least I hope so.
I like your idea on the FTSE.

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Macro Man
admin
May 20, 2008 at 1:22 PM ×

Thanks. It's worked pretty well so far...FTSE is 50 points lower than it was when I bought them.

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Anonymous
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May 20, 2008 at 3:01 PM ×

look at oil (and it's term structure..!) I get the feeling the party is over

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Mr. Prop
admin
May 20, 2008 at 8:18 PM ×

Did you see the back month, 2014 was up $8. Wow! It is the silly season for sure.

Non-linear demand destruction is a risk that stocks apparently are waking up to.

China is partly to blame, stockpiling in front of Olympics. But also, too much money chasing markets that are descending to non-functional land where liquidity is dissappearing.

How long until margin requirements are raised. I am thinking about how Hunts attempt to corner the silver market went awry. Exchange said you could only trade to close old positions. Hunts were sacrificed by those in power at the exchange who were not surprisingly the shorts.

If a position is not working, change the rules

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D
admin
May 20, 2008 at 8:37 PM ×

China does not like the USA and are more than content to recycle their dollars into something they will use (oil) instead of financial assets.

The oil bugs are worse than gold bugs these days...the end is near. Unbridled confidence in the oil trade.

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D
admin
May 20, 2008 at 8:43 PM ×

Mr Prop -

https://www.theice.com/publicdocs/futures/ICE_WTI_Crude_futures_Contract.pdf

Most people are not aware that ICE has a cash settlement option...

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Anonymous
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May 21, 2008 at 9:48 AM ×

Mr Macro,
could you tell us what is behind your risk appetite index? Thanks very much in advance.

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Macro Man
admin
May 21, 2008 at 10:08 AM ×

It's a proprietary indicator, so I'd rather not; however, it's fairly similar in terms of its input factors with some of the popular investment bank indicators. The advantage of this one, IMHO, is the manner of its construction.

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Anonymous
admin
May 21, 2008 at 10:54 AM ×

fair enough

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Adrem
admin
May 21, 2008 at 12:51 PM ×

FTSE Put. Excellent move. Fine timing.

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Macro Man
admin
May 21, 2008 at 2:14 PM ×

Thanks. Just wish I'd done more!

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