Lopsided Call Buying ... A Warning?

A subscriber of ours asked us today about the potentially bearish behavior of call buying in the S&P 500 Depository Receipts (SPY).

In theory, the put/call set-up definitely is potentially bearish from a sentiment perspective, at least in an otherwise normal market environment. We all realize that intervention and tinkering with the financial markets since late 2008 has skewed free-market pricing, or stated another way, has skewed perceptions of risk.

Indeed, with the exception of maybe a handful of instances during the past two years, I have not been able to make any money on the short side of the equity market. It does not seem to matter how bearish the indicators, or how bullish the Street, because when Quantitative Easing is perceived to be in force, selling dries up completely. The only reason the indices weakened between May and October of 2011 was a perception that QE was over. As soon as the Street had reason to believe more QE might be forthcoming, the shorts panicked out -- and slowly, methodically, the buyers trampled everyone.

At some point the playing field will be level again in equities, but right now it is anything but level. One look at the daily cash SPX versus VIX chart and you could come to the conclusion that the VIX just finished a bear flag consolidation period within its dominant decline from its October 2011 high, and, therefore, also has initiated a new down leg that should head for new lows perhaps into the 12.00-10.90 area last seen between December 2006 and February 2007.

How can the SPX continue to climb at such a steep angle? I really don't know, but it is happening, in defiance of gravity, and within a much less than ideal near and intermediate term technical set-up. Be that as it may, with the end of the month and Q1 merely four sessions away, would it be too far-fetched to suggest that the SPX could be subject to an Apple (AAPL)-like parabolic few days?

I cannot rule that out, but what I also cannot rule out is that such a parabolic move will end badly, and that our subscriber's observation about the lopsided call buying reflects large institutions taking the other side of the "retail trade," in preparation for a Q2 that is the inverse, mirror image of Q1. A scary prospect, to be sure.