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.