Option Investor
Market Wrap

Volatile Times, Despite Low VIX

Printer friendly version
      03-20-2002           High     Low     Volume Advance/Decline
DJIA    10501.57 -133.68 10626.98 10496.04 1.28 bln   1013/2142
NASDAQ   1832.87 - 48.00  1861.79  1832.87 1.38 bln   1370/2163
S&P 100   582.17 -  9.92   592.09   581.89   Totals   2383/4305
S&P 500  1151.85 - 18.44  1170.29  1151.85             
RUS 2000  499.09 -  5.69   504.73   499.04
DJ TRANS 2894.11 - 36.53  2930.06  2878.10
VIX        20.70 +  0.35    21.18    20.21
VXN        38.05 -  0.94    39.98    37.20
TRIN        1.21 
PUT/CALL    0.73

Volatile Times, Despite Low VIX
Austin Passamonte

Strong housing sector for the past few months has been great news... proof the economy is expanding. Strong housing reports today is bad news... proof that the Fed will soon raise interest rates. So we ask the obvious: would a slowing real estate sector be bullish for the market these days?

If that isn't enough proof to how irrational & emotional equity markets truly are, wait a few days and we'll have better examples. But for now the fear of rising interest rates, INTC downgrade and dead-fish technology stocks (third-tier box resellers) imploding had the markets moving lower before the bell.

Add to that the specter that General Electric, beyond question or reproach while Jack Welch ran the show is now coming into question over at PIMCO. Bill Gross, manager of the largest bond fund stated today that they would no longer own any GE corporate paper at this time. Something smells fishy with the growth model GE operates under according to Bill. I'll spare us all the mundane details as anyone interested can read it all at www.pimco.com for free.

First Jack Welch publicly admits to having a fling with some reporter who interviewed him for a magazine expose'... looks like that's not all what was exposed! Now we have questions about the pillar of capitalism, the ultimate Wall Street bellwether's modus operandi for earnings. Is anything sacred around here?

Are you as tired of INTC upgrades & downgrades as I am? Land sakes that stock barely moves and seemingly thousands of analysts cover every wiggle and squiggle it makes. Ditto for CSCO. I realize they are widely held and all, but how dynamic can their long-term outlooks possibly be?

On another note, we're hearing & reading plenty of explanation and excuses why the VIX is low, pegged to current levels and likely to move lower. I don't disagree at all. The same tired argument goes that the VIX can or will move lower yet and stay there while the new baby bull grows fat, sassy and long in the legs. Trust me: that fantasy will never happen!

(Monthly Charts: Dow & VIX)

We've heard this mantra for three years straight each time the VIX falls to 20 area and stays there a bit. Many of the bigger names in our profession took their turns at bat to explain why the VIX this low is no big deal THIS TIME around. It's always different every time. For nearly two months in mid-2000 I scaled into distant-month puts and warned every other night in Market Sentiment about the VIX at 19, 18 and 17+ before September and my ultimate payday arrived. You would not believe the email flames I endured during that time, but they abruptly ceased in the fall of 2000 when raging bubble bulls learned for their final time not to load up on calls during low VIX.

Latest rationale is that VIX levels are trending lower to historical levels. That idea began when Tony Saliba, one of the most respected pros in the option trading world said the VIX MIGHT be moving into a lower range. Looks like others took his words and rearranged them to suit bullish bias to me. Charts suggest that may not be true. Note thru most of the 1990s how smooth and deliberate uptrends were? These are monthly charts, and quite deliberate for years. Then from late 1998 to this very day we've seen monthly price action go hog wild. Up & down in unprecedented volatile fashion, yet the VIX still trades down near 20? Not a theory I'm buying, thank you very much!

(Weekly/Daily Charts: Dow)

What I have been buying plenty of are DJX May 103 puts. Each time the Dow bangs it head off 10,600 level or better I've bought a few more. Why? Look at the charts above. See where the 50 and 200 month moving averages converge near 10,100 level? See how price action is banging its head on that ascending channel? See where the lower channel (red) line offers support near 10,000? See how the recent bear flag near solid resistance broke down today? see how both weekly and daily stochastic values are turning bearish? see the VIX at 20? I've seen all this many times before. We are still in a bear market, this is a bear-market rally and countless signs point to lower levels ahead.

My May puts (DJX and SMH) have two months of time value to wait, but they might not need all of it from the looks of things tonight. Are they sure-thing trades? Heck no... that does not exist. But how many obvious technical signs do we need before acting upon them in rational fashion? The Dow may rally to 12,000 by then and my position will expire worthless, but that's not how we must bet 'em from here.

(Weekly/Daily Charts: Comp)

Nasdaq's tired, too. I actually thought the NDX and SOX amongst other tech sectors were poised for one more quick pop higher. That does not seem evident right now. This recent channel in the monthly chart isn't very defined but we have enough contact points to play with here. The bottom of that channel may be the next leg down when it comes, and 1800 level is likely to be visited tomorrow.

Very Weary
Like many of you I'm tired of the whipsaw markets. Intraday volatility makes my role triple-tough trying to pre-guess market action when we don't see back to back sessions of continuation. The Dow posted more than +500 index points of the recent rally within two session's time. One of them was a gap-higher event and option traders had no chance to capture that one, either. Miss both and upside opportunity is gone. That's the world we play in right now, like it or not. I wish the days of gentle, deliberate trends as depicted in the historical Dow chart were here but they're not. Either we adapt & survive or perish, because it is distinctly possible our yearly highs for this stock market will be posted by Memorial Day.

(10-Min Charts: S&P 100 - Nasdaq 100)

I took three trades today, which was two more than needed. The first was a sell-limit at 1170 in the S&P overnight. I woke up too early this morning to see we were already in the black. I got out on the first higher low posted and waited for further action from there.

Here we have charts of the S&P 500 and Nasdaq 100 futures. No matter what stocks we are playing, these are the symbols that lead action in the cash market. GE, IBM or MSFT going up or down? Chances are it will happen on buy or sell programs over here first. Light blue wedges show where early action tried to bounce. Prices posted higher lows while 60/30 min chart signals turned early bullish reversals up from oversold. The aggressive call play entries came on a break of those tiny wedges and I gamed SMH April calls on that move.

Faked out... the real wedge (purple) extended a bit longer before price action rolled over from there. What to do? Hold my calls and pray the charts are lying? Nope... we dumped them at "bid" and went short again from 1161 to 1152 over the next two hours. Three trades when the first one left to run would have worked nicely by itself. But these are volatile times. We see profits come & go at the speed of program trading. Who dares leave real money twisting in the breeze out there like that? Arm-chair analysts without a penny in their trading accounts (or no accounts) cannot understand why we don't simply buy & hold these days. Peers in the trenches getting math lessons at warp speed know all too well what I'm talking about.

Indexes should be going higher soon on the back of quarter-end window dressing, IRA contributions and earnings season ramps. They should be going higher because every analyst and our wise Fed tells us better times are ahead. They should be going higher because buyers want to buy and have been doing so on every dip. but that does not mean they will. Recall last March 23rd and early April for some of the biggest smashdown sessions all year.

If you are reading these words I truly care about you & your financial future. Please don't bet the farm on either direction, give yourself plenty of time premium to be right and for gosh sakes switch horses in mid-stream when adverse direction appears. Easier times to trade certainly lie ahead, but possibly not tomorrow or the next day.

Best Trading Wishes,
Austin P

Market Wrap Archives