Fatigued Stocks Flirt with the Big One

The suspicion grows that the stock market has been carving out a broad top, by turns bringing sufficient deviousness, pain, tedium, exhilaration, temptation, and most of all false hopes, to the process that even those who have been preparing for it are likely to be caught off guard when the inevitable plunge comes. Further evidence of a market suffering from terminal fatigue would have been apparent to anyone who tried to cash in on the last gasp of put and call options that were due to expire on Friday. We’ve been using this tactic ourselves with a weekly “Jackpot Bet” designed to take advantage of the enormous leverage in options that have shed nearly all of their time premium shortly before they die. Stripped bare for action, they can increase in value tenfold if the underlying stock exhibits just a little bit of Friday craziness. Unfortunately, Friday nuttiness has been nowhere in sight for weeks, requiring us to scramble just to break even on the relatively feeble moves that have occurred.

Last week, for instance, a bullish play in Google caught our attention, and we bought calls with a 565 strike price to take advantage of a fall in the stock to 559 in the early going. At that point, a mere $6 rally in five hours was all it would have taken to push calls we’d bought for 0.30 into-the-money. Google can easily do that in mere minutes when it catches fire, and if it had happened this time, our bet would have tripled with each $1 move above 565. Alas, the stock spent the entire session unable to levitate itself above 565. Actually, it finally did pop above the “jackpot threshold,” but it happened literally at the final bell, when it was too late to reap the kind of bonanza we’d sought.

Our Calls Only Doubled

A similar anticlimax played out on Friday. As the stock ratcheted down to what turned out to be its intraday low, we bought out-of-the-money calls in Netflix for 0.30 that had sold for 1.49 when the day began. And although the calls had doubled in price 20 minute later, allowing subscribers to sell half their stake and recoup the initial outlay, the failed rally turned out to be NFLX’s last hurrah. The calls subsequently went to zero, and the best we could have done was break even.

Until relatively recently, expiration Fridays provided perfect conditions for bull traders. After feinting lower on the opening bar, stocks often took such powerful leaps that they would blow past multiple strikes, triggering buying panics that fed on themselves. Now, it would seem, the rallies have grown so faint that buyers can barely push a stock to the closest strike, let alone impale it. Despite this, we sense that there is still a short-squeeze panic or two left in this market before it plummets to well-deserved hell. Or maybe not. Whatever cataclysm awaits, its destructive power can only come from one source: surprise. And what is it, you ask, that could possibly surprise us all? Each of us has a different idea about this, suggesting that what we are about to see might represent nothing less than the sum of all fears.