Just A Damn Mess Of A Market

It is more difficult to argue that we are still in a bear market, much more difficult than it was 14 or 16 months ago. But there is one big thing that seems to trouble some of the technical people out there, the charts. The charts almost look the same - not identical - but very similar.

Okay, so, to make it easy, let's say the SPY is blue, the XLF is green, the XLE is black, the QQQQ is purple, well, you get the idea. Kind of like that Tarantino movie I guess. These charts are still highly correlated and that scares them. Correlations tend to run towards 1 in a bear market. And even though we've been climbing for the past year, it has been an all-round climb. Yes, there have been some slight laggards, but nothing more than the bird at the back of the flock that may turn just a bit later than those up front, but still turns in the same direction pretty quickly.

With the confluence of ETFs and algorithmic trading, I'm not sure we'll ever see a separation in the equities markets between countries or sectors as we used to, although that would be the preference of many. Until then, this feels like a difficult market to own.

We are coming into my favorite stage in the options expiration cycle. We have about two-and-a-half weeks until expiration, and this is a time where butterflies, skip-strike butterflies and other combinations become compelling alternatives to simple calls, puts, or equities. Given that we've seen volatility remain elevated, even if it is off its highest levels, it gives us the chance to use that volatility to our advantage. Given the large amount of uncertainty in the energy area, this will be a good week to search for both bullish and bearish plays.

The attractive part of using a combination trade here is the limited use of capital, paired with limited liability. I will not limit my search to the energy sector, as there are attractive names in the technology field, including AAPL, GOOG and possibly even MSFT. The easiest area to go hunting in is the ETF space, as stock-specific news should be less cumbersome. As there are only 12 trading days, we can consider both single and leveraged ETFs, as volatility decay in leveraged ETFs can be more than offset by time decay in a combination-style options trade.

Many of the technical people have mentioned the technical damage on the daily charts, but the weekly charts are now starting to look very vulnerable. I still worry that a weekly close on the SPY below $105 will put $95 into play. We looked like we were going to leave $105 behind, but today's action very much brings it back. Unfortunately, the EFA looks like it is already headed lower, perhaps to as much as $43, while the EEM makes me believe that a break of $37 will bring a test of $35. It is just hanging on here. From a weekly standpoint, the QQQQ and IWM seem like the strongest two of the majors right now, but honestly, it is becoming more difficult to get long anything with conviction and without a hedge.

long AAPL