We heard market moving news out of the euro zone this weekend. Stringent terms on a potential ECB-Cyprus bailout triggered talk of bank runs. In my opinion such an event is precisely the type of catalyst that could derail the bull market in equities. I’ve been anticipating a correction for some time now and this may be it.
The Cyprus buzz chopped a full 2% off the S&P 500 (from Friday’s highs to overnight lows). Equity bulls fought hard to grab control of the wheel once the regular session opened this morning, paring the loss to just 0.45%.
My suggestion: at a minimum, lighten up on your exposure to long stock positions.
The current market calls to mind a popular trading adage: 'I would prefer to miss a profitable trade than be involved in a losing trade.' Equities could continue their grind higher, but the risk/reward of bullish trade is quickly turning against long positions.
And if you’re already leaning toward the bearish side, I have further recommendations below. Read on...
Five out of the last six sessions Crude oil has traded higher. As of this post April futures are $4 off their lows from last week. Prices are currently above their 18-day MA; identified by the dark blue line on the chart above. Some of my more aggressive clients have bullish exposure a few months out. My favored play currently is to be long futures while simultaneously selling out of the money calls 1:1. This leg higher in April futures is capable of lifting prices back above $95/barrel in my opinion.
RBOB And The USD
Looking at outside market influence RBOB and heating oil may have turned a corner and it appears RISK is back on. Throw into the mix that the U.S. dollar is exhibiting signs of an interim top. After the 5% appreciation in the last month we may see some back and fill on the greenback. I think this could further throw fuel on the fire, no pun intended.
Embrace the fact that we will likely be paying higher energy prices moving forward. I myself am dreading a lunch today that is 50 miles from my office today. Driving my SUV that gets roughly 12 miles per gallon I figure even if I choose not to indulge on the food which is higher because of rising commodity prices. You figure 100 miles door to door at $4/gallon were talking $35 in fuel. Of course there is not inflation excluding food and energy but a lunch meeting that would’ve cost me $50-75 5 years ago tips the scale closer to $150 today all in.