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Monday, May 01, 2006

Put Options Gain Popularity

OEX traders bought puts heavily right at the high of the day Monday. This action came one day after they bought calls very heavily on Friday. Now, normally, a great deal of put-buying is a bullish contrary indicator. But, this time, we think there's another explanation.

The smart money bought stocks when they were cheap three years ago. If their horizon is long term, they've held them for fabulous gains. Now, if they sell to avoid the bear market, the tax man will collect a big chunk of change, so we suspect that it's the smart money piling on the puts as fire insurance to make sure their stock house doesn't burn down. We shall see -- and soon. A major decline could take place in the next few weeks in the stock market.

Of course, the leaders are still leading and staying invested there -- and adding on dips -- is our preferred methodology. Certainly, good stocks can and will go down as the well-known emotional component of investors -- "thowing the baby out with the bath water" -- is a behavior as old as the hills. That's why keeping cash in reserve to take advantage of those kind of opportunities is important in a year when both the 4-year cycle high and the 4-year cycle low, are due.

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