MorningWord 01/05/15: You’ve Been #Honeydicked by the $SPX

by Dan January 5, 2015 9:13 am • Commentary

Interesting read from this morning’s Wall Street Journal. Nick Timiraos (here) highlights a concern (and was a similar concern at the start of 2014) as to whether or not a weak global economy will stall the U.S. recovery. Its indisputable that the U.S. is in the midst of a recovery in employment:

a healing labor market, one that very likely will see 2014 go down as the best year for job growth in 15 years when the Labor Department releases its December employment report on Friday.

Which coupled with the 4% GDP print in Q2 and the 3.5% GDP print in Q3 demonstrates improvement despite taking trillions of dollars in stimulus and artificially low rates to get back to these levels.  Lets see how a cold Q1 effects current data.

But all of this better than expected U.S. data with the backdrop of weak wage growth and decelerating housing data, per WSJ:


So despite lower oil in the back half of the year, low rates and improving jobless rate, our economy has bucked the global trend but remains on watch. I know you’ve heard this a million times recently but this really is a debate as to whether the U.S. can pull the global economy out of its malaise or whether the rest of the world drags the U.S. into its funk.

It is my view that the continued strength in U.S. treasuries (and rates nearing 52 week lows), the apparent stress in the high yield market, the inability for oil to find a bottom and the dollar making new multi-year highs against almost every major currency does not speak to a rosy outlook for U.S. corporate earnings as many of the tailwinds from lower input costs and low rates will be off-set by the strong dollar and weak global demand.

It’s entirely possible some of these trends reverse. And if that’s the case we could see the U.S. stock market go late 90’s on us. But if you are merely looking at the S&P 500 (SPX) just three trading days and 1.5% from its all time highs, then there is a strong chance you are being Honeydicked. These recent trends are not going to turn on a dime. Therefore the risk reward set-up here is asymmetrical. Any confirmation of weakness spreading to our shores and the market is due for a decent sized correction. Any signs of reversal of recent trends probably means slight breakouts above recent highs. Parabolic moves higher would need an all clear signal. And we’re probably a ways from that despite the hope for QE from the ECB early in the new year.

So from an options standpoint we’ll be looking at strategies to take advantage of that potential asymmetric relationship. Longs will probably need some time to play out and their expirations will be selected with that in mind. Shorts will be aggressive near term as we think a reset on the market, if it comes, is likely early in the 2015 calendar.

Our preferred structure into the end of the year was bearish leaning calendars where we played for the market to close near the highs but then see some downward pressure after the New Year. We’re now set up for that and will have to manage structures like the QQQ put calendar this week.