What’s that scent you’re wearing……?

Posted on 07/12/2011

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…….Oh, it’s called ‘Contagion’!

In overnight action, Asian equities are getting hammered like a freshman engineering student at MIT (i.e. future Citadel quant) at a Cambridge keg party; down between 1.25% (China) and 2.00% (Hong Kong).

S&P futures are tipsy as well, off by about 10 or 0.75%. Apparently the two week dose of Lithium is wearing off as news flow out of the IMF (Lagard’s statement: “nothing should be taken for granted on Greece”), Silicon Valley (Cisco intends to lay off ~10,000 employees), China (inflation running 6.4% in June after 5.5% in May and 5.3% in April), and the Beltway (don’t think Obama and Boehner are hitting the links together again anytime soon….) have sent the bulls back to the barn.

If there is an ‘actionable’ point, I would take a look at exiting half the long vol position from early last week if the Sept. S&P futures test 1300. I would expect the cash VIX to be somewhere between 21 and 23 depending on the velocity of the move (June high ~ 23). If they cascade through the round number, all eyes will be on the 200 day moving average (cash = 1272) which held during two June tests.

Things could get ‘interesting’ in a hurry if equities break through that support, which has held since we broke out last September after the Jackson Hole speech.

Alcoa, unofficially kicked off earnings season this evening with a wimper. They met the recently lowered EPS expectations, came in ahead on the revenue number and guided in line.

Google and JPM report on Thursday.

What have ya got for us Secretary, errrrrr, excuse me, Mr. Dimon?

…….and (Ed McMahon voice) HERE’S your market leader: NETFLIX!

Which do you find more indicative of what’s to come?

One last thing……..the 200 day moving average on the Euro currency is ~138.50. I expect a great deal of attention to be paid at that level. If you’re of the opinion that chicken little will be kept at bay for another month or two or perhaps the Chinese will step in again to backstop the Euro, slightly aggressive traders could look at outright calls (ATM if you are looking to flip out quick, OTM if you want to hold and prefer limited risk), those with a more robust stomach lining could look at selling OTM front month Euro puts.

I imagine implied vols will be flirting or through 52 week highs (15.25% which they reached in late Nov 2010) if the 200 day is tested.

You could also look at a ratio call spread (1X2) on the upside, 2 1/2 – 3 points wide, ideally for even money/small credit.

Trade well!!

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