Option Investor
Market Wrap

Japan In Recession

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Economic data released Sunday evening confirmed Japan was the latest major economy to fall into recession after the country's Cabinet Office said gross domestic product (GDP) contracted for a second-straight quarter, falling 0.1% (July-September) in the third quarter after a -0.9% decline in Q2 (April-June).

With the world's second-largest economy contracting for a second-straight quarter and the euro zone already in a formal recession, many traders and investors continued to trade cautiously with the United States and Britain on the brink of a recession and China's economy slowing sharply.

Nymex crude oil continued to ease into Thursday's December contract termination. December Crude (cl08z) settled down $2.09, or -3.66% at $54.95, with the U.S. Oil Fund (USO) finishing lower by just more than a bone ($1.00), or -2.21% at $45.16.

Reports of Somali pirates having hijacked a Saudi-owned supertanker off the Horn of Africa had oil prices modestly higher in the early part of this morning's trade, but the roll into Thursday's termination and easing global demand kept things in check.

After today's close, the EIA said the national average retail gasoline price plunged an additional 0.152/gallon, to $2.072/gallon for the week ended Monday.

The average price/gallon is the lowest since March 14, 2005!

Prices are now $1.027, or 33.1%, below a year earlier.

Nymex December Unleaded (rb08z) settled down $0.0645, or -5.21% at $1.1746. That's off $0.1933, or -14.13% from last Monday's settlement.

Global Economic Calendar-

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Old new travels fast; and with the Nikkei-225 having fallen 16.5% in Q3, Japan's benchmark Nikkei-225 ($NIKK) edged higher by 60-points, or +0.71% to finish Monday's trade at 8,522.58.

The yen was strong versus the greenback with the Yen CurrencyShares (FXY) $103.47 +0.83%.

Hong Kong's Hang Seng ($HSI) shed 13 points, or -0.10%, while mainland China's Shanghai Composite ($SSEC) gained 44 points, or 2.22% to reclaim the 2,000 level.

European bourses were weak with bankers and miners pacing the declines.

Housing data (Rightmove House Price Index) out of the UK helped set a negative tone for the FTSE-100 ($FTSE), which fell 100-points, or 2.38% to 4,132.16 on Monday.

Sellers in England and Wales lowered their asking prices by 2.9% on average in November, pushing prices lower by 7.1% versus a year ago.

The property Web site showed the number of new sellers dwindling to just 20,000 a week, almost half the number this time last year.

Economists noted that the bulk of the Rightmove survey was conducted before the Bank of England's (BOE) 1.5 percentage point interest rate cut on 11/06/08, which took the official rate down to 3.0%.

The Pound CurrencyShares (FXB) $150.54 +1.64% got a bounce, but the Euro CurrencyShares (FXE) $126.63 -0.33% remained bound between the $125-$130 (1.25-1.30 eur/$) going on 4-weeks.

US Intra-day Internals -

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Economic data as well as news of further job cuts at Citigroup (NYSE:C) $8.89 -6.61% found the major averages opening mixed-to-lower as the opening bell rang.

The nation's number 2 bank said it would cut 52,000 jobs by early next year in a move to offset mounting debt losses and sagging economies worldwide.

U.S. industrial output rebounded in October after hurricane disruptions (Gustav and Ike) aided a sharp decline in September.

Industrial production rose 1.3% in October after a downwardly revised 3.7% decline in September.

Just as I've noted the rise in U.S. refinery capacity utilization in recent weeks after hurricane disruptions in September, here too we see some manufacturing capacity showing a slight rebound with 76.4% of the nation's manufacturing capacity being utilized in October.

Still, the Federal Reserve noted that while the hurricane disruptions and a strike in the commercial aircraft industry impacted production negatively in September and October, excluding these two items, total production is estimated to have fallen around 0.66% in both September and October.

One note I'd have traders and investors make is a survey from the Philadelphia Fed regarding some fourth quarter figures which estimates the U.S. Q4 GDP falling by 2.4%, with a further decline of 1.1% in Q1 of 2009. The survey suggested the U.S. unemployment rate could rise 7.6% by Q3 2009.

Volumes at both exchanges were what I would consider to be anemic with the big board turning just 4.93 billion compared to its 21-day average volume of 5.85 billion.

NASDAQ volume also below its 21-day average volume of 2.33 billion shares.

I'd expect volume to pick up into this week's option expiration.

Here are some of this month's November option "Max Pain" theory tabulations. These are simply the averages of all call/put option open interest among the various strikes for November expiration at Friday's close.

"Max Pain" Theory (DIA, SPY, QQQQ, IWM, SMH, XLF, USO, GLD)

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At Friday's close, and today's, all those securities listed in the above table would currently be residing below their respective November option "Max Pain" theory tabulations.

The StreetTracks Gold (GLD) $72.65 -0.88% (~726.60 spot) today, is nearest its 11/14/08 tabulation (these can/will change daily), -4.41% below its current $76.00 tabulation and may at least be a security to monitor for any signal to where some "pain" might be delivered.

The idea behind "Max Pain" is that a short-term gravitation, or elevation of a security's PRICE in order to deliver as much "pain" to the option holder.

An OPTION trader currently holding PUT options that are PROFITABLE would be on the alert here, as an "unexplained" jump in PRICES (that's what an option expiration can deliver... unexplained price action) could be painful.

My basic thought process for TRADERS and investors is to be aware of the upcoming option expiration. Should the GLD reclaim the $76.00 level and begin moving notable higher, start assessing UPSIDE risk in other securities.

At tonight's close, the Dow Diamonds (DIA) $82.95 -1.50% would be -7.94% from its $90.00 "Max Pain" theory tabulation.

I would note here that based on last week's high/low/close for the DIA, this week's WEEKLY R1 (resistance 1) is $90.70. This week's Pivot of $85.27 (mathematical midpoint of last week's h/l/c) kept things in check, "give-or-take" $0.71 with the DIA trading a session best $85.98.

Many are under the impression that volatility measures have risen significantly since last expiration. That isn't necessarily the case, or at least my observation.

Here's a chart of the CBOE Market Volatility Index (VIX.X), which would more fully encompass the S&P 500 (SPX.X).

CBOE Market Volatility Index (VIX.X) - Daily Intervals

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Since last expiration Friday (10/17/08), the VIX.X is relatively unchanged. Actually a bit below the 70.33 level found at the 10/17/08 close.

On Thursday of last week, the VIX.X fell to 58.66, just above this month's MONTHLY Pivot of 58.20. That's a MEASURE to monitor, or assess some volatility to if we're to see a jump in SPX-SPY related PRICE action.

Today's broader market "light volumes" has me on my toes and a bit jittery. ALL INDICATORS are very BEARISH and VERY OVERSOLD.

It is like the "quiet before the storm."

S&P Depository Receipts (SPY) - Daily Intervals

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Trying to call a market into an expiration is always tough. I've noted this $97.00 "Max Pain" theory level on the SPY, and really narrowed down a "range" from the 10/10/08 intra-day low to the 10/14/08 intra-day high.

As I look at it, the SPY can't get to $97.00 without first getting above $87.77, then $91.96 and $94.55.

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