Daily Update Nov 16th, 2011
The market gave up the gains of the session very late yesterday and the broad S&P 500 index managed a close right at the 1257 level which corresponds to that flat on year “magnet” I have mentioned before which seems to be where the daily battle between buyers and sellers is being waged. The trading action yesterday was not much different than what we have seen of late. I hate to sound like a broken record in these updates but there there really hasn’t been anything different in the character of this market over the past 2 weeks.
We are reaching the third week of this consolidation and it is beginning to get “old”. By that I mean that sufficient time has passed to unwind the previously very overbought oscilators and that very soon we will need to see some resolution to this tug of war. The range we have been observing has narrowed over the past few sessions with the market making a series of higher lows and lower highs forming a symmetrical wedge pattern which by nature supports the probability of a more decided move either up or down.
The overwhelming and overriding event continues to be the worries over Europe. While many a bull market has been built on the back of investor “worries”, the potential magnitude of the Euro headlines has placed a “lid” on this market and rightly so in my opinion. While for us traders (particular those trading options) this environment presents many opportunities and potential for great returns, for the traditional investor, the risk versus rewarded presented by this debt crisis is not attractive at all.
Looking for a close this cycle at around 1250 on the S&P 500. This corresponds well with the current open interest around that strike and I do not expect a move either way until next week. Obviously the Europe headlines can cause markets to erupt at any point here but baring any major event, this is what sounds most probable with a slight bias to the upside of 1250.
Daily Update Nov 15th, 2011
Lingering concerns from Europe were somewhat mitigated this morning with some better than expected economic figures here at home. Particularly intersting was a drop in inflation which could, if sustained for a few more months, open the gates for another round of Fed easing (QE3).
This afternoon markets also seemed encouraged by the fact that apparently the new Italian prime Minister, Mario Monti, was moving quickly to build support for these austerity measures. How long this lasts is anybody’s guess…
There really wasn’t much else driving stocks on Monday. The market is maintaining the strength off of the surge higher in October but buyers are still hesitant to step up in a big way. The VIX is hanging onto the 30 level after traders twice over the past few weeks ventured to pullback on hedges only to get immediately burned.
From a purely technical standpoint, markets are well within a consolidation phase after a huge move higher and working off an overbought condition. A quick point on technical analysis and at least how I apply technical analysis to my day to day trading. Technical analysis means very little if not handicapped by other pertinent factors. By that I mean things such as sentiment, volume, momentum, seasonality, macro global headlines short term economic headlines and many others. If you don’t handicap a technical thesis with these factors, you are setting yourself up to fail. Stocks and indices do not have to stop at a support or resistance level on cue and change course or necessarily move lower when “overbought”.
Technical analysis, again in my view and I am aware that those who trade purely on the charts may find this heresy, should only used as a guideline to what most probably will happen when a stock or index trades within a certain technical pattern or reaches a particular support and resistance level. That view has to be tempered with a consideration to other factors such as I mention above.
Since HFT (high frequency trading) is such a huge part of the marketplace these days (60 to 70% of total transaction volume), we have to be very careful not to get whipsawed by blindly following any tried and true technical pattern. That is when these guys and gals are most active and in a thin market, it becomes very easy for these traders to manipulate the short term direction of the market and influence direction.
The same consideration has to be given to sentiment and sentiment based studies. These buy themselves do not make for good trading indicators by themselves but do help fortify or discredit a technical argument.
We bought to close the short Nov. QQQ 58 calls which were sold against our long QQQ June 56 calls. This is the 2nd strike we have sold against these long 56 calls and have bought both back for nice profits. Along with the buy back we also sold another round of Dec 58 strikes against the same existing long 56 calls.
A close above 1257 today would be a win for the bulls…
Nov 14th, 2011
Last week was a real wild ride in global equity markets. We saw some steep declines in the S&P to the tune of 4% on Wednesday only to put in a 3.5% rally in the following two sessions…
Today we are giving back some of the gains of Friday and the VIX has spiked nearly 10% before pairing back some. More rumblings out of Europe and today we are seeing “Spain” in the headlines which I mentioned just last week as being exactly what would happen next in this drama… Folks this is not going away anytime soon.
We are holding right at the middle of the recent range and while volatility has increased of late, volume has been really non existent. The fact that volume has increased into selloffs versus a noticeable pullback on rallies leads me to believe a continued move lower to test the recent support levels at the 50 day moving averages is likely before a push higher.
As I have been saying, there is no reason for mutual fund managers and other “big money” players to put cash to work in this environment. The seasonal skew to show better than market results are being outweighted by the headline risks out of Europe. Better to show tepid returns than risk being caught in a rush to the exits…
An inter range level that has proven to be a magnet on both up days and down days has been the flat on year level of 1257 on the S&P 500. This could come into play this expiration cycle as we may very well close in this general vacinity at expiration due to “pinning” action at around this level. “Pinning” has to do with the level of open interest at different strike prices and the fact that markets will be influenced by market maker activity during the last days of an expiration cycle and tend to gravitate to the strike with the highest level of open interest. Again, baring any unforeseen headlines, this is where we may trade to close this week.
Nov 10th, 2011
Contagion of the credit woes of Greece and the other weak members of the union to the healthier European economies has been the biggest concern of markets since this crisis began to surface some time ago.
In reality, this has been a concern to markets ever since the Euro came into being. The drastic differences between the more austere nations and the profligate southern European nations have always been something of a vulnerability within the framework of the European union and many feared that these vulnerabilities could be exploited in the right environment.
The lack of a clear framework to tackle these issues, whether good or bad, is just not part of the structure of the union and markets know this. Just as in nature where a predator hunting for a meal will focus on the weakest member in the group, the marketplace is focusing on the most vulnerable members of the European Union. In nature, once a weak member is attacked, the stronger members of the group may try and mount a challenge to save the weak member (s) from the predator if it is deemed that the weak member can still contribute to the group or If a member is ill, weak or perhaps too old, the group may not feel the challenge worth the risk and allow the weak member to be sacrificed. Such is the case at the moment in Europe. The weak nations are vulnerable to speculative atacks and the stronger member’s of the group seem to be undecided whether to mount an effort to try and save the weak members or allow them to fend on their own. The problem is that by hanging around, they are exposed to being attacked themselves… Such is the risk of contagion. The weakness in Europe stems from too much debt and is exarcerbated by a structural inability to shield its weaker members from speculative attacks.
These issues will not go away. The market senses the weakness and as free markets will do, will continue to pound away at this weakenss until the risk of doing so is greater than the reward. It is that simple. If the stronger members of the group do not do enough to change this dynamic they risk themselves being prayed upon by the market.
Here at home we have a Fed that, for better or worse, has the ability to overwhelm the market in these cases with easing programs like QE 1, 2 etc…Whether these programs are sustainable in the long run can be debated but what can’t be debated is the fact that the Fed does have this “arsenal” ready and available to use if necessary.
Yesterday we worried about Greece today we worry about Italy and tomorrow it will be Spain, Portugal and others…The cat is out of the bag and this deficiency in the European union will continue to be exploited until it is no longer a weakness. For that to happen, the stronger members will have to decide if they are staying put and mount a real challenge against speculation or opt to go off to find greener pastures…
There is no way to avoid a devaluation of the Euro and achieve this. You cannot have a strong currency while the world shuns your debt…Eventually, the ECB will have to intervene with aggressive rate cuts and similar quantitative easing programs to our own which will lead to a weaker currency but show the world that they mean business in regards to keeping the European Union intact.
Not impressed with today’s rally after a 400 point drop in the Dow Jones Industrials yesterday. Volume was unimpressive and there was nothing about today’s session that changed any of the current dynamics. Might as well be a continuation of yesterday’s trading session whereas instead of a 400 point drop we managed only a 300 point drop at the close…
Most probable move here is a continued push down to test the 50 day around the 1220 level. With the VIX trading at this level above 30 without much participation in the market (low volume) we can expect to continue bouncing around like a ping pong ball trading off of each headline out of Europe.
E.C.B. Needs To Step Up NOW!
Nov 9th, 2011
The trading action over the past 24 hours represents exactly what is holding back the markets from a push higher…
I have mentioned that for markets to start making a push higher into year end, we would first have to shed some of the worries about an immediate breakdown in Europe. Yesterday we saw the market once again push a bit higher on declining volatility. The VIX managed to pullback below 30, a level that is crucial for long term institutional money managers and mutual funds to begin considering putting money to work. Today those who waded too far in the pool have been reminded once again that headlines from Europe could still have a tremendous impact in the day to day trading action.
Today the VIX is once again trading above 30 as investors rush back in to hedge up portfolios. It is important to note though that we are not seeing outright selling of the market and volume has been tepid considering the price action. Markets make substantial moves (up or down) when institutions are involved in the market but that just hasn’t been the case. How can money managers put large amounts of cash to work in this environment? We have to keep in mind that institutions, because of the size of their trades and positions, do not have the ability to be as nimble as smaller players.
I think the market may be headed once again to the lower end of the trading range. That means a test of the 50 day MA with a potential dip as low as the 40 day. That puts us at around 1215 or so on the SPX where we should find some buying interest once again from short term traders and depending on the global macro headlines, institutional money managers.
I have to repeat that even with the near 30 point slide in the SPX today, markets are very composed. The selling that I would have expected in the Global equity markets on a blow out of Italian debt yields such as we saw today and the corresponding move lower in the Euro has not materialized, at least not yet. Either the market is totally underpricing this risk, or completely overreacting to it…
Again, in my view the uptrend channel recently formed is still intact from a technical perspective. The fundamental backdrop tells me that we may be headed to test support. In my opinion, the action today indicates a market that is still “waiting for the rain to stop but is eager to come out and play” ! So in short, look for a move lower to perhaps 1220 or so before another try at a push higher.
The wildcard in this thesis is if the ECB comes out with the proverbial “bazooka”. This means a ramp up of bond buying (particularly debt of Italy) to push out speculators along with more easing. I understand that the ECB does not have the legal mandate to act in that capacity but I think if the situation gets dire enough they may throw that to the winds and intervene. In this case scenario, we could see another massive drop in implied volatility and a barn burner of a rally. Today at least, I favor the move a bit lower as most probable case scenario.
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