Newsletter of Danny Merkel - Issue #125
Market Review:
It’s turning out to be an incredibly painful year for short-sellers. Everyday, heavily shorted stocks are exploding higher, and this is benefiting certain areas, such as the ARK Innovation ETF, which is up another 10% so far this month.
Although it may be tempting to join this short-covering fiesta, ARKK still hasn’t printed a single new 52-week-high this year.
Furthermore, price is now venturing deeper into the massive overhead resistance zone as shown below:
Though it’s had a good run, this long-term picture shows that price is miles away from new all-time-highs. Based on my studies of market history, once a bubble bursts, the best case scenario is that it takes a decade for a new ATH to be reached; the worst case scenario is that a new ATH is never reached.
Put/Call Ratio:
Betting against the S&P 500 is a formidable challenge and one I choose to avoid due to the fact that I consider the index to be a kind of Trend-Following system.
Making money buying put options is also a formidable challenge because options generally are overvalued (I’ll expand on this concept in a future post).
Logically, therefore, buying overvalued puts on the tough to short S&P 500 is doubly challenging.
And this year has really proven this point. As I mentioned previously, 2023 began with an enormous build up of put buying. Just as investors were maximally loaded up with puts, the market refused to budge an inch lower and thus began a long and painful unwind of these bearish bets.
Fast forward to today, and we can see that these put buyers have been blown out completely. The put/call ratio just hit a new low on Friday.
The general idea is that when everybody wants puts, that’s the time you don’t need them. When nobody wants to touch puts ever again, that’s the time you want them.