EOT Position Update – February 24, 2016

Market Snapshot

Stocks continue to move in lockstep with oil.

And volatility is increasing… over the last month, the S&P 500 has daily swings of more than 1% in 2 out of every 3 days.

We’re also seeing sovereign wealth funds cash out of their stock holdings.

Oil exporting countries that had been profiting from $100 oil were pouring their profits into stocks.  Now they’re selling stock to raise cash with oil below $30 per barrel.

The recent rally off the February lows appears to be fueled by short-covering.  In other words, traders locked in gains on their bets that stocks would move lower.

But the low volume is indicative of a lack of conviction from buyers.  This market could easily roll over and push to new lows.

We’ve seen the probability of a recession move up over the last few weeks.  And more market participants now view the current economic cycle as late-cycle than mid-cycle.  The last time we saw views like this for the economy was 2006.

What’s more, the US manufacturing sector is already in a recession.  And projections for the Ag sector show farm income will come in at the lowest levels in years.

There’s not much good news outside of the US job market that remains strong.  And the weekly jobless claims are starting to trend higher.

Meanwhile, the Fed continues to discuss rate hikes and inflation.  I’ve said before and I’ll say it again… the Fed’s horrible with projections and predictions.  They’ve missed the mark by a wide margin again.

In short, there’s a lot of uncertainty and volatility.

As a result, option premiums are higher, spreads are wider, and the cost of options is more expensive than we have seen in quite awhile.  It’s a difficult environment to find cheap options on stocks that are exhibiting bullish or bearish momentum.

We’ll continue to examine our trade process and recommend the types of trades with the potential for huge gains you have come to expect.

Category: EOT Update