Holiday Sale: SPY Puts On The Clearance Rack

If you are closet bear who hasn't yet figured out how to express your skepticism, or a even a cautious bull who hasn't had time in this holiday season to get some hedges in place, boy do I have good news for you. Right now, you can get many put options on SPY at the lowest prices since summer. The index typically used to gauge interest in SPY Puts, the VIX, hasn't been this low since July.

It's possible that the VIX is telling us it's time to get bullish. But none of the other "risk assets" seem to be in agreement with VIX. Have a look at the following collection of comparative charts, each is some risk asset divided by SPY over the last year. When it's rising, it's outperforming SPY, when it's falling, SPY is outperforming the asset. In theory, each of these should be outperforming SPY in an environment where risk is embraced.

We'll start with Emerging markets using EEM (iShares MSCI Emerging Markets Index Fund ETF). EEM:SPY has been warning that global growth is stalling in "emerging" economies since late summer.

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In fact, the entire rest of the world has sold off relative to SPY in recent months, as shown using VT (Vangaurd Total World Stock EFF) in VT:SPY.

So the U.S. is the place to be, right? Yes, that has definitely been the case in 2011. However, it's worth noting that in recent months, the "riskier" factions of the U.S. markets have been underperforming.

Some large cap tech companies have recently warned that growth appears to be slowing. So perhaps it's not surprising that QQQ (Powershares Nasdaq) has underperformed SPY dramatically in recent months.

IWM (iShares Russell 2000 Index) has failed to gain traction against SPY in recent months as money has flowed in defensive sectors like Utilities and Healthcare.

Commodities have also underperformed in recent months as the US Dollar has strengthened. DBC (Powershares DB Commodity Index) has slid dramatically against SPY since September, accelerating downward in December.

Where we've seen strength relative to the S&P is Treasuries. TLT (iShares Barclays 20+ Year Treasury Bond ETF) has maintained the relative strength that started in August. That charts warns of deflation, not Inflation.

What I gather from the ratios above is that for most of the investment world, risk is off. Which takes me back to the idea of SPY puts. The VIX, which tracks volatility expectation for the S&P, has fallen off a cliff in recent weeks. You would think risk assets would be flying given how the VIX has collapsed in December.

But in the charts above, we showed that they are collapsing, not surging. I believe this disconnect will not go on indefinitely. With SPY puts selling off through the month of December, often slipping in price on days when the S&P is also in the red, they have become a relatively cheap way to hedge long positions or express bearishness.

Perhaps the market has decided systemic risk is off the table in Europe, or that the U.S. economy can decouple from slowing growth in the rest of the world. I don't know why Mr. Market has brought down the price of SPY puts so dramatically, but I know that the complacency evidenced by the current VIX reading, along with weakness in risk assets relative to SPY (in the charts above), makes me think Santa has put SPY puts on the clearance rack just for me.

Disclosure: I am long SH. I own SPY puts.