Tuesday, October 14, 2008

Volatility Easing?

Top Line: The stock market is in the process of telling us what it wants to do now. Tuesday's response to Monday's monster rally was to sell off, a natural event.

The stock market jumped to a huge gain on Tuesday morning which did give us an opportunity to sell the strength. Of course we didn't actually take advantage of it but looking back to Friday afternoon to Tuesday morning, you can see how the stock market might be a little tired.

You may recall that with two hours until the close on Friday, the Dow dipped below 8000. On Tuesday morning, after about ten trading hours, the Dow traded around 9800, an 1800 point move about 180 points an hour on average. Similarly, the NDX, our favorite index, traded down around 1200 late Friday and opened at 1470 on Tuesday, for 270 points.

To think the rest of Tuesday was spent selling off seems like a reasonable thing. It gives people a chance to sell smiling that they waited for a bounce. Once these sellers get done, we should see another little run but when will they be done?

The selloff in the NDX was more than in the Dow, with bank stocks moving higher, but both were well within normal ranges. Actually, the Dow selloff was almost a perfect 38.2% Fibonacci retracement at the day's low. Wednesday should be interesting.

Tonight after the market closed, INTC announced earnings that were a little bit of an upside surprise, at least to us. INTC did have some trouble providing guidance for next quarter but the market was fairly happy for the news. For some reason, which we're not too sure about, after enjoying a little pop after the INTC news, the US futures fell off and are down a little this evening.

[Ok, we did find something...a Fed official, although not an interest rate setting voting member, thinks the US may be in a recession. Janet Yellen said this evening that she has changed her mind on the economy and she is now thinking the third quarter GDP may be flat.]

What we left you with in our last post was our tells for continued market strength, lower Treasury bonds and lower VXO. On Tuesday, Treasury bonds continued lower and the VXO dropped a little, too, even in the face of selling from the opening bell. The market opened up 400 points but sold off most of the day. This action should indicate further strength in the market.

One other item we should mention is the options expiration this Friday. Our opinion is that the expiration this month will bring buying into the market. Since the VXO is still high and coming down off even a higher level, put buying has been the biggest game in town. We don't think these puts will be rewarded with even more selling. These puts will be squeezed out by Friday and that should start on Wednesday. This is our best guess for what drives the stock market this week.


We think the excitement in the market is about over. So much volatility can not be maintained for long, it's too exhausting. With the break in prices last week, the market is still trying to find its bearings and we will have more fits and starts but we do think the Friday low around 7900 in the Dow should be the 2008 low. If the volatility does slow down, we may actually have time to explore some other ideas or maybe some pics of Jackson.

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