[Russ Winter]

There now appears to be a substantial bet being made that the Fed, ECB  and others will engage in even more wild experiments on monetary policy. The Fed meets Jan 24-25, and it is my sense is that with oil already resurgent and well above $100 that a decision will be delayed.  This could set up an expectation correction along the lines seen last August.  Adding to the inability for the Fed to act are Nigeria oil facility strikes now in the fourth day. Secondly with Ron Paul running strong and a general anti-Fed attitude among most candidates the political climate is not conducive.

On Strait of Hormuz watch comments from Ehud Barak, Israeli Defense Minister, that after September a successful attack on Iran’s nuclear sites will no longer be possible.   Religare has an interesting  MENA strategy out discussing the window on attacking Iran’s nuclear facility putting the odds at almost fifty-fifty over the next month or two. Two US aircraft carriers are now in the region.



We are also entering a window where Greece forces a coercive default. Coercive is just code for doing what they should have done all along before they brought in banksters to run the country, just refuse to make the interest payments. That removes the facade that Greek bonds are trading at anything other than how they actually trade on markets, about 20-25 cents on the dollar.

Against this backdrop and a dozen other black swans, the market has managed to work itself into extreme complacency combined with pre-flash crash conditions. This what I wrote back in May, 2010 before the flash crash, and bears repeating now. There has also been a large drop in short interest.

The automated algo trading is back in vogue. We are seeing the 1-2% pops on volume that is often on a third of what was seen in declines of similar magnitude last week.  Just look at the 2% move this morning in IWM, and compare the volume with the decline. Most of the volume even on this advance is during the brief pullbacks. Yesterday we once again saw what happens when some volume shows up on the sell side, quick weakness. The morning we see little volume and stocks just undulate higher.    They don’t really surge, and I not quite sure what the best word in English is to describe this, so I will use the “not-right” market. Again the test of the “not- right” is when stock for sale comes to market.  The players will then realize that there is no bid underneath. I am not sure how many times this will be repeated before the Not- Rights figure it all out, but we will find out in due course.

The second thing that has happened is that VIX has dropped off to low levels and has made put buying possible. Be advised that buying puts often necessitates taking some losses before a score. However we now have the combination of cheap puts combined with the possibility of a major downside catalyst that would both blow out the premium and take advantage of a jailbreak.  The strategy will be to use out of the money the Jan options that expire the 21st in SPY,  XLB, XRT, and JNK.  Use JNK 38.74 if you can trade it inside the spread. IV is about 4. Use SPY 125, XRT 51, XLB 35.  Scale in and I will use about one quarter of one percent of my capital for the January round, and if the dam fails to burst, look at the next weekly.  I will post trades in comments.







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