Daily Market Update – March 12, 2014 (9:30 AM)

This is getting to the point of becoming more than just simply a dreary week.

Dreary I can take, but when it’s accompanied by portfolio losses I have a harder time accepting the lack of anything of substance.

Despite Monday’s comeback late in the session there was no follow through to Tuesday and that day saw lots of large moves that smelled of profit taking. The kind that doesn’t necessarily lead to re-investment, but rather the kind that’s borne out of caution. That lack of substance can also be a call to put something away for a rainy day.

This morning’s pre-open trading continues with that mildly negative tone, but has seen in the past few days that kind of non-committal tone can easily become one of surrender even when there’s no news to create conviction, elation or fear.

The rest of this week is essentially devoid of expected news. Too bad, because that creates a situation similar to someone who is should be racked by guilt but finds diversion from daily events suddenly being cast into a desolate room and forced to be alone with his thoughts.

Not a pretty sight.

Somehow engineers from centuries ago were able to figure out architectural designs that allowed their works to stand up under their own weight. That may be what’s needed now as the market is at such heights that common sense would suggest that some kind of support would be necessary to sustain the heights.

Where is the support coming from?

Despite that question being a reasonable one to be asked it has been the same reasonable question for much of the rally that we’ve all come to consider the normal state of affairs. While you can make a case that the Federal Reserve was responsible for much of that rally its impact should only decrease unless events convince the FOMC to turn the flow higher. That can’t be a good thing if it ever got to that point, despite the response having potentially positive impacts.

Ultimately support can only come from economic news that reflects a growing economy. Unfortunately, with the interconnected nature of the world that also requires similar news coming from other corners of the world, especially China.

Looking backward, however, most would agree that markets climb higher during that part of an economic cycle that is in recovery. During such phases relative measures of growth are exaggerated due to the low baselines that receive comparison. By contrast, when improvement becomes truly tangible markets slow down. Then, of course, comes the invariable slow down of growth which is the signal for markets to reverse direction.

If accepting that simplistic summary of economic and market cycles then the best situation is continued economic mediocrity, never quite getting to its potential, with alternating bits of good and bad economic news.

Of course, that’s the same scenario whereby a covered option strategy for any particular stock does its best, as well.

As usual, I try to see a positive light out of a weaker market. That positive would be increasing volatility and improved option premiums that would al
so make it easier to use longer term options instead of the weekly variety. What is sometimes difficult is the period of transition. The premiums don’t immediately go higher, especially in the out weeks. Very often you can see just how the options market is predicting the future course of the market by looking at the premiums in successive weeks. Higher than usual weekly premiums with low premiums in more distant weeks tells you if a market that is bearish acutely, but not extending that outlook very far.

Barely a month ago that transition seemed to be occurring as the market headed toward a quick 7% decline and even out weeks were beginning to show some premium expansion. but the volatility quickly declined as the correction was stopped dead in its tracks and even more quickly saw its course fully reversed.

Today may likely be a day of watching to see where the market decides to go at the mid-way mark for the week and planning for dispositions for thi and next week monthly cycle expiration.

 

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