Options Expiration Dates Still Important

As I have indicated in the past, presently markets are heavily influenced by speculators. One of the most important tools used by speculators are options. And, options expire worthless after certain dates creating a lot of volatility.

The situation has not changed. Markets rose up until the days just after options expiration in January. That is exactly the same as what is happening today on 2/24/2014. (It is a clear sign that the market is dominated by speculators.)

But after reaching all time highs in January, market indexes fell by nearly 7% over the next two weeks. One cannot predict with certainty that the pattern will repeat, but it is important to remember that the markets are ignoring a lot of bad economic news.

It appears that speculators are still following the same “logic” that they have followed for a year: A) In a good economy, rising interest rates won’t matter and/or; B) In a poor economy, the Fed will continue or even expand its stimulus. I call this the “you can’t lose” belief.

History teaches that when a significant part of the market adopts this “you can’t lose” belief, it is a sign that there are very few buyers left and a market correction will likely come soon. It is particularly dangerous when those that believe the “you can’t lose” story are speculators. Speculators have a tendency to move like a herd, when they exit, usually they all panic and exit at once.  

Like all of history’s lessons, they are not right 100% of the time. And, the “soon” does not always mean next week, next month, or even next year.

So, we still have a lot of uncertainty and therefore what I perceive as a dangerous market. Buy, Sell or Hold?  As frustrating as it can be, Hold and caution still seems the prudent course of action for retired or close to retirement investors.