Net Short

With nearly an 8% run over the past week and most indicators pointing to overbought conditions I feel that there is more risk to the downside than the upside at this point. The McClellan Oscillator is near extreme overbought levels and fairly far away from it's mean.

I am fairly short, possibly too short but I feel like there are very few times you have the market up against technical resistance at 950 along with an overbought condition. This should further reduce the upside risk potential however I do fear that we may get one last hoorah move that could shake the weak shorts and send them scrambling for cover. I am not necessarily bearish on the market, it just is the lower risk play and that is the smart trade to take.

IYR is a big annoyance as it continues to move up for no apparent reason. I do have more time on those options but it is pushing my patience and loss limit to the max. I noticed that IBM is very far away from any averages or reference point and thought it could be a good mean reversion play in the short term. Long term I like the stock but the point is to trade isn't it? ;-) Could be a good trade down to at least 110. I would have taken it but I was already into my other short positions and didn't want to take more risk on to the bearish side. I of course got short right into the face of a GS upgrade of the S&P index. They raised their outlook to 1,060, which is definitely possible if we break out but hopefully it is a contrarian indicator for the time being. Just like oil if we have a break out it could be a self fulfilling prophecy to 1,060.

I took my profits on USO today as it was close to my target of 35.00. Of course as I expected it traded up to 35 premarket when I can do nothing and then sold back down to 34.60 at the open. Overall, it seems to have been a decent move because oil is currently trading down but we wll see what happens over the next couple days. The dollar was fairly weak today as the Euro broke out of its recent range. Interesting to note was the divergence in the treasury market. 10-year treasury prices moved up with equities which is the opposite of what you would expect. This could be a possible bearish divergence for stocks as people are anticipating a pullback and get into safer assets.

I bought puts on the SPY looking for at least a 2% correction to the 930 level, ideally the 915 level. Financials have run pretty far fairly fast as well so you could see some profit taking over the next couple days weighing down the market. USB reports before the open Wednesday and I am rooting for them for personal reasons. :-)

We'll see how tomorrow shapes up, we could have a run at new highs as shorts get squeezed. AAPL reports after the bell, I actual sold a strangle into earnings, however in hindsight it may have been an essentially worthless move because implied volatility is the lowest I have seen in a while. However on the bright side I chose a fairly broad range so if it finishes within that range I collect the premium on both sides which has about an 80% chance of happening. It may have been smarter to sell a strangle on AMZN since it is cheaper and IV is higher, I still may do it.

IYR was the main reason for the losses today, I get annoyed that the SPY options trade for 15 mins after the close because it can amplify your gains or losses prematurely. In this case it added an additional percent to the losses.

I will also be releasing my latest article tomorrow for The Davian Letter at www.davianletter.com about option selection.

Total Return for 2009: 152%