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Although the markets are overextended and fundamentals do not support further rises, and even higher P/Es, there are a few possibilities for stocks to continue climbing higher:
1. Companies in the U.S. that have foreign earnings may report very high earnings due to the collapse of the U.S. dollar
2. Banks could report very high earnings due to the Fed's policy of zero interest rates. The banks borrow for free, yet they are still charging much higher rates. Got XLF?
3. Trillions of dollars are sitting on the sidelines, owned by investors who ran away from the stock markets during the crisis. Once Q3 earnings start to appear, these investors may come back, further fuelling stock rallies.
4. The Fed and the U.S. government need stocks to rise so that people make money - and extend the tax base, capping the collapse in tax revenues.
The S&P500 is poised for its biggest fourth-quarter rally in a decade according to Byron Wien, vice chairman of Blackstone Group LP. The pumping is on.
So, throwing fundamentals out the window, stocks may continue to climb. However, if they keep climbing, RSIs will again reach nose bleed levels, and October is also a notorious month for volatility - and stock market crashes.
Anything can happen. It does not matter. Investors can potentially profit fro this situation with straddles. Here are some for October, November, and December, for our favorite IWM (Russel 2000), as well as XLF (Financials) and SPY (S&P 500). They were computed with the StraddlesCalc V2 tool. The tables show optimum position sizing for $1k invested in each branch (use multiples of these for higher investments), and the maximum moves required to achieve profitability. Actual moves may be lower depending on time to expiry. All are highly liquid.
IWM:
XLF:
SPY:
To receive technical analysis and alerts on these ETFs, enter the symbols in the Technical Trend Analysis Tool, (powered by INO).
As always, options are very dangerous. Please do your own due dilligence.
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