Stocks' 17% Gain Since Bernanke Disclosed QE2 Disarms Critics-
Will The Lowest Hedging On Record Play Tricks On OpEx Day When Open Interest Is Rumored To Be At All Time Highs?
As there is very little trading volume in general these days, and far less non-robotic trading volume, today's trading will likely be defined almost exclusively by Wall Street's option trading brigade. As it is option expiration day, we expect a very rigorous attempt to take out all the pins where the open interest is highest. And courtesy of Sentiment Trader, we could be in for a doozy. Based on his Equity Hedging index, we are at an all time low in terms of his just created proprietary Hedging Activity index. Which means that a record number of people are currently unhedged. Couple this with rumors of one of the highest open interests in existence, and it may get ugly soon. As for forecastability of what this means in terms of returns, it's not pretty: "When the EHI dropped below 20, during the next three months the maximum gain in the S&P 500 averaged +2.5% while the maximum decline averaged -5.9%. Each time, any short-term upside progress was erased during a swift corrective period at best." Then again, in a bizarro market entirely dominated by the Fed's telegraphing of its equity purchase decisions, we are fairly confident that the predictive prowess of any existing indicator is largely in doubt at a time when none of the traditional market dynamics are even close to being relevant.
From Sentiment Trader
It's worth noting that the most recent reading of the Equity Hedging Index is at a new record low (data dates back to 2001). You can find more background on the indicator here. When we look at the various ways most speculators hedge against a decline, there is almost unanimous agreement among them. Each hedging component is scored from 0 (no hedging) to 100 (extreme hedging). Right now, three of them are at 0, three more are under 10 and one is at 36, giving us an overall average reading of 8. The previous record low was a reading of 9 on 12/23/04.