Obama is Likely to Lay an Egg Thursday Night, Markets Will Respond Accordingly

by Dan September 6, 2011 1:43 pm • Commentary

Expectations are just too darn high for the President as he heads into Thursday evening’s much anticipated speech on job creation…….Frankly, it is just too late in this cycle for the markets to be anything other than disappointed, in my opinion.

I want to use SPY weekly Put Spreads to make a low premium bet that the SPX breaks the Aug 9th closing low of 1121 and heads straight for the nice round number of 1100.  

TRADE: SPY (~$116) BUY the Sept9 weekly 111/110 Put Spread for .12

-Buy Sept9th 111 put for .50

-Sell Sept9th 110 Put at .38

Break-Even on Sept9th exp:

Profit: btwn 110.88 and 110 make up to .88, below 110 make make full .88 or 7x your money.

Losses: btwn 110.88 and 111 lose up to .12 and above 111 lose all .12 premium that you paid.

TRADE RATIONALE: Today’s less than huge market reaction to what has happened in Europe over the last 2 trading days is a joke and some ways may be giving you a great opportunity for a near term entry point to short the market.  I want to pick a technical point where I think the market can go in a set period of time around a catalyst….this trade helps me achieve all of those objectives with a minimal premium outlay, but offers a great payout potential if I am right.

The chart below of the DAX vs the SPX tells me something has to give and I am convinced the news gets worse before it gets better…..

[caption id="attachment_4519" align="aligncenter" width="300" caption="1 YR DAX vs SPX from Bloomberg"][/caption]


The lack of Fed action and the inability of the President to help in complicated issues such as job creation could mean the market forces the Fed’s hand later in the month by making fresh lows.

On a near term basis the SPX is moderately oversold, and the chart below shows the uptrend and constructive channel making a series of higher highs and higher lows…..

[caption id="attachment_4522" align="aligncenter" width="300" caption="2 Month SPX chart from Bloomberg"][/caption]


While it looks like it is making a spike bottom today, given the out-performance to Europe and the expected disappointment to the President’s speech I think there is a good chance that we make new closing lows this week….