Quite the day today, eh?
You always feel a little stupid buying a stock the day before the market cracks, like I did yesterday, buying a gold stock and a coal trust. However, you feel good selling stocks the day before, as I did yesterday with the mortgage REITs. You also feel really, really good when you realize you are very long gamma via the put options you own. Today, I went from being under-hedged to being over-hedged as the market decided risk was back in style and bid option premiums up across the board. Option premiums have been ridiculously cheap. Now they are not, and if you owned put options, they are suddenly much more valuable than they were yesterday. Thus, I wound up having my best day of the year today.
There is absolutely no doubt that today was a pivotal day in the market. I have been expecting this for a few months now, though I had no idea it would happen today. Of course, I had no idea that the Chinese government would be clamping down on rampant speculation either, but that's what makes the market so interesting, especially when market participants aren't pricing risk properly.
Don't let the bullish/pollyannish market commentators on Bubblevision, BloombergTV, ROBTV, etc., lull you into a sense of complacency. The market is damaged and the tone has changed. The S&P 500 rose 20% in eight months, with nary a bump along the way, while the bull market has been going on a full four years. Bull markets don't go on forever. Eventually the bear growls, and it did so today in a big, big way. We smashed through the downside boundary of the recent uptrend, and went through the 50-day like it wasn't even there. Whereas for the past four years, dips were to be bought, now, rallies are to be sold and shorted. Even if we rally tomorrow, the uptrend has been broken. Now, the goal is to protect capital.
Also of significance was the sell-off of the dollar to the yen. Japan has been a big source of liquidity as it seems every single bank and every single hedge fund was borrowing cheaply in yen and buying anything risky elsewhere. Today, that trade lost money. We'll see if the yen carry trade begins to unravel. If it does, the fireworks have just begun.
The fun has started. Strap yourself in and protect your savings.