Why is everyone so bearish on the stock market?

First off, let me toot my own horn. The options trade I recommended last week worked out beautifully. SPY opened on Monday at 205.50. So if you wrote the expiring 205 straddle, you made about two points. If you just bought the market, you made about a point and a half.

Second, I want to point to an article by Richard Bernstein Still no one Wants to Play. It expresses my sentiments exactly. I know a lot of professional traders, and I real a lot more. These folks are  overwhelmingly frightened and mostly bearish. Why? I can think of three reasons.

First (as Bernstein says), many people look at history and think that the economic/market cycle is well advanced. What they miss here is that this cycle has played out very slowly, There are good reasons for this, and they have to do with the very slow return of confidence. The upshot is that we are nowhere near the end of the cycle. If I had a dime for every well known prognosticator who forecasted a recession (or claimed that we were in one now)....

Second, almost all the pros now trading suffered a near-death experience in 2008, and that has remained firmly in their reptilian brain. Like I said in a much earlier post: 2008 was the Gen X version of what inflation was to the boomers. It will keep them frightened till they retire or die or both. Just like the fear of inflation led many in my generation to miss the greatest bull market in bonds ever, they will miss out on risk assets.

Finally, and directly relevant to commodities, is China and the far east. No I don't mean that they are over producing and destroying our jobs. They are, but they are also oversaving. This savings has to go somewhere, and a lot of it is leaving China (with good reason). So there is a very large inflow into mostly low risk assets that is keeping the equilibrium rate of interest low. The forecasts of the Fed's "dotters" that we will get back to a 4% fed funds rate in this decade is crazy. More like 2.5% top. This may be bad for Wall Street (another reason they are so glum), but it's great for valuations.

OK, enough of the rant. Suffice it to say that at some point the rally in risk assets may well have legs. I'm guessing that time may be now. This is a risk / reward type of play. I'm long upside calls.

Tactical Option Trade

This is not my kind of trade, and it is definitely not strategic. However, there may be a decent risk/reward in the expiring SPY options. SPY as many of you know is the largest option market in the US, and has all sorts of feedback with actual stock prices. The options that expire this Friday have an abnormal open interest at the 205 strike.

Strike  OI
195      178K
200      149
205      393
210      201

Many of you have already noticed that, in the absence of new fundamentals, prices tend to go to the strike with heavy OI. There is good reason for this. As time to expiration goes to zero, the near-the-money options have very high gammas. For example, on expiration day if it's above the strike the delta is near one and near zero if it's below. So holders of these options tend to hedge as it moves around the strike. There is also an incentive for large option traders to pin it to the strike: they can trade on the Saturday following the last trading day on the Board, while retail cannot.

So the trade is to sell the 205 straddle. Obviously this is picking up pennies in front of the steamroller. But if you keep the size low and determine to do it every execution day, it does have a nice trade profile. I'm not doing it; it doesn't square with the name of this blog. But maybe you should?

What to do with Soybeans Here

The USDA gave us bean bulls a nice present on Tuesday with a big change in bean consumption /  ending stocks. The market responded as expected and then some. So what to do now?

My guess is that we will need some additional bullish info to keep the market moving up. Given the time of the year, that would probably have to be weather related. So far weather in the midwest has been quite good. The NOAA has a three month climatological forecast of near normal to slightly above precip and near normal temps . So my guess is that beans and corn both will at best tread water and more likely give back some of their gains until we get some real issues. But I don't see a huge downside. The ending stocks are  going to be tight enough that any actual crop problem will require demand rationing. So I took almost all off and am reestablishing on declines.

World Bank Commodity Data

I've graphed the commodity price data from the World Bank. Previously, I was using the IMF data. Many of the price series are similar. However, the WB does have some different ones, and they started in 1960 vs. the IMF's 1980. To account for this very long series, I used the annual data rather than monthly. The last point is the current price.

The graph are all deflated time series using the US PCE deflator and the $US value. I graphed them as time series rather than the 10-year returns of the IMF graphs. I'll get to that later.

There are 73 price series.

Here's the link for the first 25:

Here's the link for the next 25:

Here's the last bunch: