Welcome back Mike!!!..Interesting article borrowed from another thread
"To:Gottfried who wrote (19803)
From: kodiak_bull Thursday, Jun 12, 2003 1:09 PM
Respond to of 19804
I get this on a free trial basis, and generally find it of interest, although not of enough interest to become a paying customer.
21stcenturyalert.com.
FYI:
"Smart" Money
by David Nichols
There's an old cliché that says from 1929 to 1930, the amateurs lost their money in the markets; the smart money lost their money in 1931; and the very smart money lost theirs in 1932.
The point is that bear markets eventually find a way to beat every single strategy.
What could explain the market's endless rise right now? Obviously there is now money coming in "off the sidelines" to fuel an excessive demand for stocks. Determining whether that excessive demand for stocks will be proven correct is clearly not the market's current business. Right now the current goal is to squeeze out every last remaining bear.
One thing that I think is happening is the traders that have been right about the markets over the past few years, and making money, are sticking with their strategies. (Me included, I guess.) The "hot money" has been buying puts and betting against this historically overbought market. Yet when prices refuse to buckle under, this hot money has to take their lumps on shorts and puts, driving the market up further as they capitulate and buy back positions.
In this chart from SentimenTrader (available on our web site for subscribers), we can see how the normally astute traders on the OEX -- the S&P 100 -- have been betting against this rally in a big way. This is a crowd that history tells us not to "fade" very often.
The Editor of SentimenTrader, Jason Goepfert, puts it this way: "The OEX put/call open interest ratio should be considered in a non-contrarian manner. As put open interest rises in relation to call open interest, it suggests that OEX option traders - usually quite successful at identifying market turning points - are accumulating put positions. This is a bearish development. Conversely, if OEX traders are accumulating call positions, then the put/call open interest ratio should fall, which is normally a bullish development."
We can see how this group of traders has a great track record at picking tops and bottoms. As a group, they've been making money throughout this bear market. (As a side note, it's unlikely traders are selling OEX options, as these are American-style options that can be exercised prior to expiration; options sellers vastly prefer to sell European-style options, like the XEO or the SPX, that cannot be exercised prior to expiration).
This put/call open interest ratio is stretched way, way beyond the norm. These traders are loaded to the gills with puts. They have seen the low VIX (the VIX is computed from the OEX) and the overstretched rally, and they are loading up on puts -- not because they have to, which would drive up the VIX with the strong demand, but because they want to.
Yet the market keeps blowing these put positions out. The bulls are now so relaxed, after such a massive uptrend, that they are in no hurry to do anything. They've got a big profit cushion to sit on. The bears, on the other hand, keep getting blown out. And then they re-load shorts at a higher level, and then they get blown out again. It's the "smart" money's turn to get worked over right now. It's 1932 all over again. Another reason this may have extended so long is the smart money has lots of profits to work with, from 2 years of "easy-pickings" during the bear market for technically-oriented, experienced traders.
At some point, this cycle will break. It will take some bad news and a desire to quickly take profits on the part of the bulls. Or the weight of profitable positions will simply be too much for the market to carry. This is how V-bottoms usually form without a visible catalyst -- the value of puts and short positions becomes so great that traders have to start taking profits. Now the calls are carrying the value, and people may want to book profits ahead of expiration next week.
We may also see the "smart" money give up on puts, and start to buy calls. The market likely needs such a capitulation yet again. We saw this last Friday, and there was some evidence of this happening into the close yesterday too.
We may get another such capitulation on a gap up this morning. Today, I'm on the lookout for a double top at Friday's highs, and a pullback that sells off straight through into options expiration next Friday. This market is pushing out of bounds on the upside again, just like last Friday, which usually signifies that long positions are carrying too much value for traders to resist taking profits. So it's likely we'll see how the market survives in this rarified air a second time around.
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