The market opened with a little steam but not very much. The price move was labored and at the end of the day the volume was very light. In fact, for the week, volume has averaged less than 1.5 billion shares on the NYSE. Don’t forget that this is an options expiration week and there is usually stronger volume.
So, with not much really going on during the trading day, MSFT made a negative statement after the closing bell that pushed down after hours trading. CEO Steve Ballmer said that some analysts may have projected higher revenue for VISTA than is justified by the PC growth rates over the same period.
This little tidbit seemed to cool the normally exuberant post-closing bell buyers. The drop in MSFT’s price was modest but with the market cap that it carries, it weighed on the overnight futures.
In a regular old top, volume would be swelling, in our opinion, as this price level would bring out sellers to meet the heavy demand of buyers. That is just not the case here at Record highs in the Dow. No, quite the opposite is occurring with volume actually contracting in Thursday’s trading. To our way of thinking this is called exhaustion.
Our analysis shows that the momentum has not been part of this latest move up to new record highs, this includes relative strength.
Bottom line is that the market is in a precarious position perched at the top of the cliff. Will it go higher or can it go higher? Of course, anything is possible but today’s action suggests that the bulls are very tired.
Friday offers us an opportunity to see if the bears can be awakened from their hibernation. Since November, the Dow has bounced off trendline support and the time has come to challenge that line. If you looked at where the Dow is, you would know that this week’s rally has moved the price significantly above that trendline. That means there is some distance to get down to it and then through it.
Tonight we think the time has come for a couple of bearish option plays. We have been talking about and publishing the closing bid/ask price, that of the VIX May 07 calls. A call is an option that benefits from a rise in price. While this trade is a little backwards, what else would you expect from us contrarians, it makes sense if you follow the logic.
The VIX is low because there is no fear in the market due to the high price levels. When the market goes down, this index will go up and eventually give us a buy stock signal when it spikes up. While it is going up the market will most likely be going down. That is why we want to buy a call on the VIX. With a possible drop in the market in the morning, we may have to chase this trade a little but we will try to be patient and get a good price, around 1.35.
That’s enough options talk for one night. There will be other times for us to talk about put options in the coming weeks.
Have a great weekend and take some time to analyze your exposure to stocks.
Dow Industrials: 12,765.01 +23.15
VIXEC.X: 1.25 x 1.40