Trade Update on the Russell 2000 Bullish Bet
- Posted by ZorTrades
- on June 16th, 2011
Let me start by saying, the market is back to break-even for the year: Russell 2000 started at 783.65, we closed at 779.46, SP500 started at 1257.64, we closed at 1265.42. This is brand new ball game (especially for those who run OPM), it’s like starting the year all over again in the middle of June. This is important, because even though the market was up about 8% not to long ago, a lot of active players were getting chopped up and trailing the market, the buy and hold don’t worry type were killing it. Hopefully, the 8% drubbing in the last 2 weeks have not hurt your performance that much. We as a firm have been trading lightly, and have a couple of scrapes that could be taken care of with some neosporing: -1.65%
On 6/8/2011 we wrote a post titled Bounce or Flash Time For The SP500. At the time, based on some sentiment indicators that we follow, we initiated a position on $TNA (triple Rut 2k bull ETF). So far those sentiment indicators have not worked out as we expected. The total cboe put to call ratio as now closed 11 consecutive days above 1.00, the 10 day moving average is now at 1.14. According to TradersNarrative, “Option Traders Most Bearish Since 2009 bear market bottom”. While we have not seen a jumpy, panicky $VIX, we have seen a rush by investors to buy puts. As far as our $TNA position: we now have an average cost of 71.42, we were able to sell some June 74 calls for $1.10, effectively bringing down our cost on the bulk of the position to 70.32:
Our initial intentions were to buy slowly into the $TNA, which we have. Our biggest fear is having the market cascade with no bounces like it did in 2008:
While many are looking at line in the sand type levels, like 1250-1257 on the SP500, what we are looking for is either outright panic, or stabilization to add to the $TNA. Selling it at a lost is another option, the market is very dynamic and hard to commit to certain plans when they are so many moving parts.
Here are some contrarian bullish tidbits to consider:
- The option activity is at levels were market bottoms have happen. We believe that we are going to get a bounce, we always do, but we are not sure this is THE bottom.
- We have a decent oversold reading right now.
- The $VIX is finally getting a little jumpy.
- The 200 day moving average across the indexes might bring out some buyers.
- We are finally hearing about hedge funds who are getting destroyed this year (Paulson).
- Only 20% of stocks are trading above their 40 day moving average:
Like we said in our bounce or flash post, 99% of investors should not even consider trying to pick a bottom. Hold on to your cash and let the market prove itself first. Remember, pullbacks/corrections have a habit of highlighting future winners, but you won’t be able to take advantage if your not discipline.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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Frank Zorrilla is the founder and chief investment officer of Zor Capital LLC.He began his Wall Street career 10 days after his 20th birthday when he became a Series 7 licensed stock broker. More »