This is a monthly chart of the S&P 500 Index going back to 1986. The top section of the chart shows the percentage of stocks trading above their 200 day moving averages. The 25% and 75% levels are marked and shows how a break of these levels coincides with at least a short term extreme in the market. Currently this indicator has fallen from being above the 75% level, but is not near the 25% level that has marked some previous bottoms in the market.
One thing that is certain is that the market isn't very likely to sit still at this level. One way to take advantage of this is to look at buying both calls and puts on the SPY. In looking at this trade today, buying the September 145 calls and puts would cost roughly $8.40. This equates to around 5.8%. To break even with this idea, the market would need to have a move of 5.8% or greater by the third Friday in September. It is important to watch the cost of this type of trade and make sure there is enough energy in the market to accommodate such a move. With the expectations of more Federal Reserve action and more news of the effects of sub-prime credit problems, the market should be able to move 5% from this level. This type of trade is best placed when market volatility is low. This is not the case now, but this trade would have worked best back when the market volatility was low and the percentage of stocks above their 200day moving average was above 75%.
CBOE OEX Volatility Index(click to enlarge)
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