Fooled Again (At Least for Now)

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Wow, what a difference a few days make. Should we call this latest rally the Yellen rally?

Just two days ago everyone was fearful of a decline, yet now all is forgotten. Now we can all get back to sitting back and comfortably watching the market the five year + bull market continue, right? Wrong.

We can’t ignore all of the bearish indicators that have entered the market as of late. And these aren’t your typical short-term indicators. we are seeing historical extremes that have led to intermediate-term declines. I’m not calling for a crash. I’m just being realistic. We haven’t seen a notable, healthy correction in a long, long time. And the lack of a pullback is showing up in the background.

We have a lack of hedging activity (lowest in four years), spread between Dumb and Smart money has hit an extreme, money markets in the Rydex have dropped to a 12-year low, newsletter sentiment is the most optimistic in history, and the stock/bond ratio has pushed beyond three standard deviations. These are historic extremes that should not be ignored. Again, I’m not saying the market is going to crash…what I am saying is that we should see a decent reprieve over the next 3-6 months so we need to start considering using various strategies to take advantage of a range-bound to lower market.

Over the past several weeks, I have been talking about the market offering some decent areas to buy puts. Fortunately, as my subscribers can attest to, I have only made one such trade and that was in XOP, which thankfully was a winner. However, several days ago, I did place a few bear call spreads and with the recent rally you can probably guess where they are right now, yes underwater. But that is the beauty of credit spreads. As long as the underlying ETF or stock closes below our short strike we make a max profit. Even though both trades are showing a loss we are still well under our short strikes and I remain very confident in both trades.

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