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Feeding the Ducks?


An historic contraction in volatility this year cooked up a whack-a-mole stew of selling volatility.

Every time the market got hit, it was just another Sunday at Church for the Buy the Dip Congregation.

Lately, it seems like it's Sunday every day.

The bounce back from last Wednesday's air pocket set the land speed record for baptism by fire with the market jackknifing back into safety before you could say Lazarus.

Never underestimate the scent of a ‘free lunch' to lure the best and brightest financial engineers on Wall Street, the only place where the caboose always is in front of the engine.

In other words, it's always the derivatives, leverage, and tangential strategies that drive the money train.

You don't make the billions the banks and hedgies do with plain vanilla.

When a political snowball from hell rolled onto The Street last week with the SPX hovering just below all-time highs and option expiration just days away, players who sold volatility were in jeopardy of choking on their own free lunch strategies.

So in the best tradition of a bull in a China shop, it looks like players had no choice but to throw a Hail Mary into the fray and put on a Squeeze Play beginning last Thursday.

What better way to do this then to let Wednesday's selling run its course and close on its low before jacking this 18-wheeler back up out of the blue.

Well it wasn't completely out of the blue.

Mr. Geometry lent a hand with the SPX closing directly 90 degrees off the key 2401 level last Wednesday.

While a week ago, all hell broke loose and it looked like the SPX would finally test the key 2280-2300 level or worse, today, the hall of mirrors at 2400 is back in play… again.

This must be the 7th attempt to covert 2400.

I've lost count.

The action certainly speaks to the idea that ‘There's Something About  2400' as we flagged before March.

Some think the bulls have run out of money with a Big Seller sitting on 2400, or that there's a lot of hedging going on there.

Maybe, but underneath the surface, a handful of ‘Nifty Fifty' names have been ripping higher.

These include our old friends AAOI, SHOP, LITE, TTD, PFPT, WDAY and IRBT as well as the runaway Chinese Brigade, WB, SINA and SOHU.

If I owned a major fund, this would be my strategy: I'd keep the indices flat below a ceiling of say 2400 and buy my belly full of stocks, keeping the crowd in suspense and competition at bay as they sold each time the index kissed 2400, only to be rejected. Then I'd add to my longs on each pullback.

Once and only once I was ready, I'd let the SPX vault 2400 and start feeding the ducks, distributing positions into the quacking now that the ‘coast was clear'.

I'm just sayin': if it looks like a duck and quacks like a duck…

The bulls would love nothing more than to get a close meaningfully above 2400 going into the long weekend.

With names like X creeping higher as flagged yesterday and IBM catching a bid this morning, and with energy names getting a lift from $50+ oil, the junkyard dogs may create enough of a tail wind to chase the SPX over 2400 into early June, where a possible time/price square-out is on the table.

However, I'm not so sure a breakout is an all clear: if the SPX satisfies our long outstanding target over the next few weeks, the bite of the bear may ultimately prove worse than the bark of the bulls.

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