Monday morning the stock market thought it would try to start the day with a little upside. That’s about all it was as the Dow managed about 25 points before rolling over and dropping into the negative about a half hour into the session. The Dow traded in a narrow range for a few hours and then fell a little more but managed a little recovery into the closing bell that left it only about 28 points lower.
The important part of Monday’s trading will be tested in Tuesday’s trading. What was different about Monday was the lack of any real buying after the prices dropped. There was also a lack of volume, Monday being the lightest trading session of the year for the NYSE. Tuesday will be a telling day.
As mentioned in the last post, the stock market will take priority in our discussions this week and maybe longer depending on how the market moves.
Looking at the pattern of trading, the stock market has now satisfied some key bearish positioning. The trading in the past month has been setting us up for a top and now that we have some technical evidence in place we will look for further confirmation of the downtrend.
While it may sound wrong, the market needs to rally a little to correct the drop we’ve seen in the past few days. We don’t think much of an advance is necessary and it may not advance much at all. If it does rally, we want to make sure it does not push up to break last week’s highs. If so, we may need to adjust our thinking one more time.
With the current setup, and the fact that we’re near the end of earnings season and in the middle of a month, we don’t see much buying pressure showing itself over the course of the next couple of weeks. Much will hinge on Tuesday’s trading. As we view the situation, there is a distinct possibility of a little rally during the day that may or may not hold the entire day. If we get the rally in the early part of the day, that would not be a good thing for the bulls. Actually, that would not be that great for us, since we have some funds that need to be added to the short side.
There seems to be an eerie silence in the market the past few days. The big news on Monday was the drop in the oil price. The market hasn’t really know how to understand the price of oil especially since, for most of the market’s rally in the past year, oil has been rising. Now there is a section of the media who say that the price of oil dropping is a bullish thing (too). We say, oil can do what it is doing but, when it goes down, there are forces that will pull the stock market down at the same time. Forget oil, watch the market.
We have been looking at a couple of interesting ideas and now think the time may be right to get serious about some of them. One of them is the VIX. With the market getting a little dose of dropping, the VIX has started to respond by going up a bit. This is one indicator that we have included in the table below for several months now. We think if the market is about to go down a little this next few months, we might want to consider getting involved with this index. One way to do this is to buy call options on the index. That way, when the index moves up, the calls will move up with it. We will present this idea better in the coming days. With any rally, the VIX should move back down a little and give us an opportunity to buy some calls at reasonable prices.
Tonight we want to add one to the table below, that would be the 15s of May 2007, symbol VIXEC.X. The closing price is not always a very good indicator of the option due to stale quotes so we will indicate the bid and ask. Our opinion is that the VIX can climb to 20 in the coming weeks and ultimately much higher than that. If the VIX can get back to 20, this call option could be worth $5. Something for us to think about and for you to not think about—unless you are crazy like we are. Comments are welcome.
Dow Industrials: 12,552.55 -28.28
VIXEC.X: 1.45 X 1.60