Biggest Surge Since 1933

As mentioned in The Big Picture blog, "we have now had four consecutive days of a higher market, something we
have not seen since June this year. This is also the S&P 500
biggest four-day surge (+18.0%) since 1933."  That italicized phrase shocks me.  I guess I just didn't realize how far we have come and how quickly it happened. Eighteen percent.  That's almost an entire bull market rally in itself, and this one only required four trading days.

Does anyone know what's next?  I haven't a clue.  One moment the news is horrible.  The recession is deepening, unemployment is rising, the bailout plan shows no signs of progress, consumer sentiment is decidedly negative.  The president has disappeared from sight. 

Are a few news conferences by the president-elect enough to restore confidence?  Impossible, says I.

So what's going on?  This can easily be a bear-market rally.  It's also possible that the bottom has formed and it's clear sailing ahead.  One – or probably both – of these statements is incorrect. 

If you anticipate a vigorous resumption of the bear market, at least puts are cheaper than they were a week ago.

If you are too bullish to contain your enthusiasm, calls are more expensive due to the rally, but at least the implied volatility has come down.

If you are an iron condor buyer (reminder: when you buy an iron condor, you sell a call spread and a put spread) like I am, then any sizable move is unwelcome.

What to do?  That's the big question.  One thing is certain:  if you get it right, you can be a big winner.


4 Responses to Biggest Surge Since 1933

  1. DP 11/30/2008 at 11:41 AM #

    Before we get too excited about the big surge, let’s keep in mind it doesn’t get us back to even the early November “election rally”, which came after the early October crash, which came after a solid year of downtrend. The major indices are still down close to 50% from their peak and November was still one of the worst months on record.
    In the meantime, I’ve been having a blast with out of the money strangles.
    Where are we headed? Who can say. On the one hand we have the doom scenario, the crash of financials, consumer spending power reduced by non-existent home equity, and simultaneous increase in credit card interest rates while credit limits are lowered. On the other hand, “black friday” seems to have been better than expected and there is some optimism about a new administration.
    Personally I think I’m going to get out stocks completely in December and just play with a few small strangles 3 months out to give the big moves time.

  2. Mark Wolfinger 11/30/2008 at 11:50 AM #

    Hi DP,
    I’m not excited by this market surge. It certainly doesn’t make me bullish. In fact, this rally has surprised me (I never know what’s going to happen next).
    Congrats on finding the best (by far) options play available – and that’s the purchase of puts and calls. I’ve only bought a few for protection. I want to caution readers that this strategy is not suitable for everyone.
    Keep in mind that this strategy, as with all others, doesn’t work forever. But it’s great that you been having a blast! Thanks for sharing.

  3. DP 11/30/2008 at 2:01 PM #

    Thanks Mark, and it is definitely worth stressing that what I’m doing is only going to work temporarily while volatility is so high. Even within those parameters, it is only working on massively beaten down stocks that are going to move big one way or another – I currently have 3 strangles on DRYS, LVS and C. The whole “play” was financed by profits from a coin toss (and it was a coin toss) on Citigroup LEAPS the Friday before their bailout. Very small positions, not an investment strategy, just to jump in at the deep end an learn.
    At the same time I took out those three positions, I tried it on a higher value stock (MOS) on paper only just to see if it would work. Since that time MOS has moved from 24 to 30, a 25% increase, but the paper value of the calls have decreased because of the lower volatility over the same time period. The puts of course are also in the red. You already had a very timely post on volatility a few days ago and this just reinforces the wisdom of that post.
    One thing that brings home how crazy this market is. I bought your book a couple of weeks ago but only in the last few days started to read it. I love the references to “big moves” in a stock of 10% etc. Who would have thought when you wrote that those “big moves” of 10% would be the entire S&P 500, in the time frame of a day? Wow.

  4. Mark Wolfinger 11/30/2008 at 2:57 PM #

    Those one-day gigantic moves would have been considered as unbelievable black swan events. Now they attract little attention. Simply amazing.