Daily Update
Monday, December 12th, 2011
We are pulling back today although admittedly on low volume as the market digests the outcome of the European talks of last week. The outcome of the meeting failed to address some of the meat and potato issues of this crisis but it has done enough to buy some time into March. Those bearish the market based on this outocme are expressing their sentiment today. I think it will be short lived and I would not be surprised if we see a narrowing of the loss into the close today.
Even if we do hold the lower levels today, I am still confident that there is limited downside to the market at this juncture of the year. In my opinion the selloff today is not indicative of a another eminent leg lower and may give some participants the opportunity to cover shorts. As we near year end, many participants that are short the market will opt to cover positions and go out the year squared up.
Another unwelcome bit of news today is the lowering of profit expectations by Intel which is having perhaps more of an impact on the selloff than anything else. The profit warnings could be an issue to the year end rally and should this become a major issue with many other companies issuing similar warnings going forward, the market may have difficulty making much progress no matter the season…
Gold is selling off sharply today. We took profits on our bearish GLD spread today as we had already taken in 50% of the maximum possible gain on the spread. The pullback in Gold is also a limited move in my opinion as we are getting close to the 200 day moving average at around GLD 158 which should offer some support. The reason Gold is selling off here is twofold. The first reason is that the US dollar is trading extremely strong and there seems to be no signs of worrisome inflation in the economy. Secondly, many European Gold investors have been selling Gold to raise funds (Euros) to repatriate. This is true particularly of the European banks which hold quite a bit of the metal. I think there may be a bit more to this weaker Gold trade but we will need to restructure a trade to reflect the timeframe of our play.
A lot of chatter today about the weakness of the BRIC nations and their corresponding stock markets this year. All of the BRIC players (Brazil, Russia, India and China) have had double digit down years so far and many are speculating more trouble ahead into next year. This is certainly an issue to watch for into 2012.
The VIX today is behaving extremely well considering the price action. This could be indicative of some optimism that the worst of this crisis is behind us for 2011 or it may indicate a market that is exhibiting complacency. Again I am going to fall on the side of the latter and say that this is a good indication that this selloff will not succeed and will be very short lived.
Daily Update
Tuesday, December 13th, 2011
Markets gave up the ghost over the last 2 to 3 hours of trading as traders took their cues from the dollar which traded higher, above 80.00 on the DXY. The European issues along with concerns over Iran and their threats of closing important crude oil navigation pathways.
The Fed’s policy announcement did not present anything new to traders and nothing much was really expected to come out of today’s meeting. The Fed would be hard pressed to make any policy adjustments at this time of the year and most feel any more accommodations would probably come during the 1st Quarter of 2012.
The price action was choppy and the market traded both up 100+ points and down 100+ points on the Dow Jones industrials. The financials added to the change of direction midday as there was a rumor circulating that a major downgrade of European sovereign debt was eminent possibly coming after market hours today. The turn in financials was a major contributor to the slide as were the large cap techs such as Intel.
Early in the session we saw a major implosion of implied volatility and the cash VIX plunged to a session low of 23.24. The cash VIX managed to print below the 200 day moving average for the first time since the Late July of this year. After the move lower, the volatility index pushed back higher but only by a few percentage points before closing the session below the 200 day moving average. The move lower in the VIX is important and particularly so because it has traded lower several days consecutively which is what we like to see when vol pulls back. The “rate of change” is important and I think we will probably make another move lower tomorrow making another lower low and lower high. The reason this is so important for traders is that it implies that traders are taking off some hedges or pushing hedges further down the expiration cycle.
The next couple of days should be choppy but generally I believe we will trade higher from these levels. The market seems to want to go higher as interpreted by the action of the VIX and I think if we see another couple of days of this type of action, we will push higher.
There is a gap in the SPY at 121.00 which may get filled if we trade lower. This may be the low point from here and year end and I would see it as an important trading entry point particularly if we don’t see any expansion of volatility (VIX).
Daily Update
Friday, December 16th, 2011
A busy day of trading due to quadruple expirations comes to an end and markets closed pretty much at the flat line. After trading substantially higher early on, the rally lost momentum and we gradually sold off into the afternoon only to push a bit higher into a flat close. The volatile trading gave us opportunity to manage our way out of the short expiring leg on the SPY 127/124 diagonal ratio and half of the long puts.
The seasonal studies, as we know, set up well for a bullish end to the year particularly when the year sets up as it has this year and although that has yet to materialize, it does not mean that it is out of the question that we get some sort of push into the last 2 weeks of the month. The first two weeks of December are historically most often mixed and most of the strength due the this “seasonal” effect coming in the latter half of the month. Like I said yesterday, do I think this scenario is likely? Yes I do, perhaps not as emphatically as I did earlier but I still think there is quite a bit of short covering ahead which could spark a decent rally into year end.
Now that the expiration related trade is behind us, we could be in for a “dull” period which favors the bulls and as the old saying goes,” never short a dull market”.
I have to believe that the downgrade of the Euro nations by S&P has to be priced into this market. I think they have done a decent job telegraphing this to participants so I am not sure how much of an impact this would have on the market. It may actually be a bullish catalyst once it is out there and done with.
The currency markets are also stabilizing a bit and it may very well be that we see some near term bounce in the Euro versus the USD which would bode well for any potential rally. In the short term, I would not be surprised if we see a push to around 133.00 on the Euro and for the dollar index (.DXY) to push lower. Gold seems to also have stabilized at these levels and I believe the heavy selling may be behind us for the time being. The GLD has been pummeled by the move lower and interestingly enough the physical holdings of Gold in the GLD are actually worth more than the actual trading price of the ETF!. These skews don’t happen very often and are usually short lived. In fact, my trading systems alerted on both a bullish GLD and FXE play today but I opted to hold off for the immediate moment to reevaluate early next week..
The trading pattern in December has been one of lower intra-day highs and lower intra-day lows as we can see on the study below. For any bullish momentum to develop we will have to break this pattern which very nearly corresponds to the 50 period moving average on the 60 minute charts. Below we see that early in the month we began a pattern of lower intra-day highs after three failed attempts to make an intraday higher high. Although we failed to make an intra-day higher high today, we came very close. Monday, I would look for an intraday high above 122.94 to possibly be a catalyst for bullish momentum. On the other hand, the opposite is true for continued failure to break this pattern. The bears will continue to trade this staircase pattern down until there is sufficient momentum building the opposite way.
Also from a technical perspective, we have to consider the trading gaps that are left open in these same studies. The late November gap from the recent lows is still open and as I mentioned before these gaps tend to close sooner rather than later. The timing of the close can vary widely but this 2 point gap in the SPY will eventually need to be filled. The filling of this gap would take us down to 1170 on the S&P…
Again the question here should be not “if” but “when”. We certainly seem to be well on the way after making an about turn on the 8th of December and starting that “staircase lower pattern” I spoke about earlier. What I have been evaluating today though is how the S&P 500 has behaved at the 50% Fibonacci retracement from the recent trading low of Nov 25th of SPY 116.30 and the highs set in early December of SPY 127.13. We have managed to hold this intraday level over the past few days which may be a good sign for a turnaround next week.
Hopefully I haven’t confused anyone too much! As almost always is the case there are two opposing but equally plausible technical arguments to consider. Either we move lower and attempt to close that short term open gap at 1170 or we push higher in the next few weeks to perhaps only stumble early in the New Year. My view is that we will not erase the full move higher from the late November lows and that the second half of the month will be solid for the bulls. That being said, we are at the point of max discomfort with this thesis and the market needs to hold this level. Reason why we are opting to hold the SPY puts into next week along with the bullish XLE calls and IWM call spreads. We should have ample opportunity to trade these positions as the market figures out what it wants to do next…
C.J. Mendes
cjm
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