Interdum stultus opportuna loquitur...

Tuesday, July 19, 2005

USRant: Time To Buy (Volatility, That Is)...

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Sometimes you have to grab your nuts and jump; I think this is one of those times. Anybody who still thinks it's wise to be short volatility (i.e., betting on a market rise from here, without a decent sized pullback) has got to be on something.

Timing, as they say, is everything. That said, there is almost no chance that the US equity indices can rise from here by any appreciable amount, without driving the market into logical 'disconnects'. Chief among those is that implied volatility is falling while actual volatility is rising. That shows nothing new - call option buyers are idiots at tops (we all knew that) - but it is something to keep in mind.

For now, I think it's sensible to revert to a selling bias. the S&P futures could jump to 1240 (or even a little higher), but the balance of risks now tilts solidly towards a nice hard pullback. That doesn't take the 1300 year-end target off the table; it just means that the market is unlikely to get there in a straight line.

Sensible strategies include: selling call premium for those who already own stocks - although with low implied volatility the premium received is contracting; buying out-of-the-money index put options (particularly over the tech indices) either as a hedge or as an outright 'bet'; buying VIX volatility through holding long VIX futures.

The last one is probably the safest strategy for now, since volatility could (and should) expand almost regardless of the direction of the market. If the VIX dips back towards 10, buying VIX futures (the symbol is VX or VIX depending on your data provider) would seem a no-brainer.

The contract is specified in terms of an 'increased value' VIX (i.e., the VIX multiplied by ten), and currently the front-month is August (which closed at 126.4). A 1-point move in the VIX futures is equivalent to a 0.1 point move in the underlying VIX, and has a value of $100; thus a 1-point move in the underlying VIX (from 10 to 11, say) results in a profit of $1000 per contract. The contract margin requirement is $3750, but it's  also possible to buy options over the futures in order to reduce the required outlay.

Federal Reserve Open Market Operations

The Fed's Open Market Operations desk performed 1 repurchase operation - a $3.75billion, 2-day repurchase with $3.357billion in T-backed collateral. Although it was performed at a substantial discount to the Fed Funds rate (FFR) it was not large enough to make a difference to the underlying market trajectory.

Major US Indices

After 4 minutes of trade, the Dow was above 10650 at 10663.70 points; IBM's post-session earnings release was given credit for the rise, but frankly that's hokum. A load of people are trying to front-run earnings reports from later in the week (most notably, Intel and Motorola - which were due after the close today and now released) and Caterpillar, due on Thursday before the open. We are back in the 2000/01 world of the 'whisper number'... and those who listened to the whispers about Intel got smacked after hours.

After that massive surge at the open, the Dow Jones Industrial Average actually went backwards (net) during the rest of the session. By the close it had kept hold of a gain of 71.57 points (0.68%), closing out the day at 10646.56 points. The index hit an intraday high of 10668.52 at the end of the first hour (and 10:26 NY time, as it happens), after opening at its low (10576.9 - a statistical fiction, remember).

Within the blue-chip index, 21 stocks rose, the biggest gainers being Caterpillar (CAT, +5.08% to $53.40) and Microsoft (MSFT, +2.39% to $26.16), which accounted for 25 Dow points between them. Losers in the Dow numbered 9 and were led by Hewlett Packard (HPQ, -1.61% to $24.52) and Citigroup (C, -1.33% to $44.40), with these two stocks contributing -8 Dow points worth of downward pressure on the index. Volume traded was tilted in favour of the gainers by 370.7m shares to 107.7m.

The broader S&P500 gained 8.22 points (0.67%), to end the session at 1229.35. Within the index, gainers numbered 353, while 137 S&P500 stocks fell for the day. Volume was tilted 2.3:1 in favour of the winners with 1343.00 million units traded in the winners as compared with 573.40 million traded in the losers.

Over at Times Square, the Nasdaq Composite added 28.31 points (1.32%), to close at 2173.18, while larger-cap technology issues fared worse with the Nasdaq100 adding 20.4 points (1.3%), to end at 1590.49 points. Within the tech benchmark, gainers numbered 70, while 25 Nasdaq100 stocks fell for the day. Volume was tilted 9.4:1 in favour of the winners with 648.26 million traded in the winners compared to 69.18 million in the losers.

Those who were pinning their hopes on whispers touting INTC's and MOTs earnings (which are now out) will wake tomorrow to a modest shock. Intel's earnings 'beat the Street' by a cent (the usual, in the re-corrupted system that followed the hollowed-out Regulation FD), with revenue right in the mid-point of the guidance range. INTC is down over 3% in the overnight market. Motorola did exactly the same, 'beating the Street' by the ubiquitous penny - although MOT's revenue outcome was better than expected. MOT is down over 4% in post-market trade. The overall result of these two reports has been for Nasdaq futures to be down 11.5 points in after-hours trade... almost half of the day's gains given back already, and almost everyone who bought after the day-session open is now underwater. Sucked in.

NYSE Volume was super-chunky, with 2.04 billion shares changing hands, while Nasdaq Volume was chunky, with 1.63 billion shares being shifted from one online brokerage account to another (and back again, in all likelihood).

Major Market Statistics
Dow Jones Industrial Average10646.5671.570.68%
Nasdaq Composite2173.1828.311.32%
NYSE Volume2.04bn--
Nasdaq Volume1.63bn--


My 9-stock "bellwethers" group rose by an average of 0.69%; note yet again the lack of traction for Citigroup. If the most-manipulated stock on the entire US market is not advancing, that is a definite harbinger of nasties down the track.

  • General Electric (GE) +$0.13 (0.37%) to $35.33;
  • Citigroup (C) -$0.60 (1.33%) to $44.40;
  • Wal Mart (WMT) -$0.23 (0.46%) to $49.76;
  • I.B.M. (IBM) +$1.89 (2.31%) to $83.70;
  • Intel (INTC) +$0.48 (1.7%) to $28.71;
  • Cisco Systems (CSCO) +$0.52 (2.65%) to $20.17;
  • eBay (EBAY) +$0.47 (1.35%) to $35.37;
  • Fannie Mae (FNM) -$0.29 (0.49%) to $59.13; and
  • Freddie Mac (FRE) +$0.08 (0.12%) to $66.53.

Market Breadth & Internals

NYSE advancing Issues exceeded decliners by 2290 to 1001 for a single-day A/D reading of 1289; Nasdaq gainers trumped losers by 2068 to 1000. The 10-day moving average of the A/D line rose to 316.4 on the NYSE, while the 10dma of the Nasdaq A/D rose to 189.9.

NYSE advancing volume exceeded volume in decliners by 1314.7 to 686.8 million shares; Nasdaq advancing volume was greater than volume in decliners by 1272.1 to 328.7 million shares.

222 NYSE-listed stocks rose to new 52-week highs, and 18 posted fresh 52-week lows, while on the Nasdaq there were 151 stocks that hit new 52-week highs, and 23 which fell to fresh 52-week lows.

I said last week that in order to get to my swing high target of 19730-ish, the VIX would have to hit single-figures (i.e., below 10). I didn't notice that it got as low as 10.13 intraday on Friday. Anyone with half a brain should be looking to buy VIX futures (i.e., to be long volatility) on any further decline in VIX... the complacency is almost NeoTrot in its gall. It's as if the entire 'investment' community takes the same view of the market as Wolfowitz and his fellow crackpots took of the invasion of Iraq... "What could possibly go wrong?"

Market Breadth Statistics

Advancing Volume (m)1314.671272.14
Declining Volume (m)686.84328.67
New Highs222151
New Lows1823

Market Sentiment Statistics
CBOE Volatility Index10.43-0.42-3.87%
CBOE Nasdaq Volatility Index13.15-0.71-5.12%
Equity Put-Call Ratio0.61-0.14-18.67%
10-day PCR0.5200%
SPX-VIX Ratio117.95.324.73%

Bond Market Analysis

Bonds rose at the long end, with the yield on the benchmark 30-year Treasury bond shedding 3.4 bps to 4.433%. The 30-year T-bond future rose almost a point from its session low (115-11/32) to close at 116-02/32 (after setting an afternoon high of 116-07/32). As usual, the reliable old oversold %R with CCI divergence on an hourly chart picked the intraday low. Ominously for bond shorts, as the bond made new higher intraday highs there was no sign of a divergence on the CCI (at least, not yet). Still, the market is recovering from a deeply oversold daily chart, so that's not a big surprise.

The middle of the yield curve was broadly higher: five year yields fell to 3.989%, and ten-year yields fell to 4.189%.

Spreads between short-dated (2-yr) Treasuries and high-grade corporate bonds of similar maturity profiles were 4.0 bps tighter at -9.0 basis points; spreads between longer dated Treasuries and their corporate AAA counterparts fell to 32.0 bps for 10-year AAA, and 72.0 bps for 20-years.

Credit spreads (spreads between corporate bonds of the same maturity profile but different creditworthiness) were mixed with the AAA-A spread on 20-years unchanged at 37.0 basis points and the 10-year AAA-A spread unchanged at 17.0 bps.

Treasury Yields
UST 13wk (yld)3.22200%
UST 2Y (yld)3.880.041.04%
UST 5Y (yld)3.989-0.029-0.72%
UST 10Y (yld)4.189-0.034-0.81%
UST 30Y (yld)4.433-0.034-0.76%

The Banks Index declined 0.17 points (0.17%), ending the day at 100.58; within the index,

  • Wachovia (WB) -$1.27 (2.49%) to $49.73;
  • State Street (STT) -$0.83 (1.62%) to $50.55;
  • Citigroup (C) -$0.60 (1.33%) to $44.40;
  • JPMorganChase (JPM) -$0.30 (0.84%) to $35.21; and
  • Washington Mutual (WM) -$0.33 (0.8%) to $41.00.

The Broker-dealer Index rose 2.46 points (1.45%), ending the day at 171.66; the ticket clippers lined up as follows -

  • Jeffries Group (JEF) +$2.28 (5.92%) to $40.80;
  • Charles Schwab (SCH) +$0.39 (2.92%) to $13.76;
  • Merrill Lynch (MER) +$1.31 (2.31%) to $57.98;
  • Legg Mason (LM) +$1.93 (1.75%) to $112.31; and
  • Lehman Brothers (LEH) +$1.70 (1.62%) to $106.75.

The Philadelphia SOX (Semiconductor) index added 7.91 points (1.72%), at 468.75

  • Advanced Micro Devices (AMD) +$0.73 (3.66%) to $20.67;
  • Infineon Tech (IFX) +$0.32 (3.17%) to $10.40;
  • Applied Materials (AMAT) +$0.47 (2.73%) to $17.69;
  • Broadcom (BRCM) +$1.00 (2.6%) to $39.39; and
  • ST Microelectronic (STM) +$0.43 (2.44%) to $18.02.

Gold & Silver Markets

Gold fell by $0.80 (0.19%) to close at $420.20 per ounce. Keep watching that US dollar index...

The Gold Bugs Index posted a rise of 0.8 points (0.41%), to end the session at 193.93

  • Golden Star (GSS) +$0.07 (2.38%) to $3.01;
  • Hecla Mining (HL) +$0.08 (2.02%) to $4.05;
  • Goldcorp (GG) +$0.26 (1.71%) to $15.45;
  • Meridian Gold (MDG) +$0.28 (1.65%) to $17.29; and
  • Eldorado Gold (EGO) +$0.04 (1.57%) to $2.58.

Silver fell by $0.02 (0.29%) to close at $6.96 per ounce. The Gold and Silver Index (XAU) gained 0.45 points (0.5%), ending the day at 90.29 points.

  • Goldcorp (GG) +$0.26 (1.71%) to $15.45;
  • Meridian Gold (MDG) +$0.28 (1.65%) to $17.29;
  • Barrick Gold (ABX) +$0.26 (1.1%) to $23.81; and
  • Newmont Mining (NEM) +$0.31 (0.84%) to $37.19.
Precious Metals and Indices
PHLX Gold and Silver Index90.290.450.5%
AMEX Gold BUGS Index193.930.80.41%

Oil Market

Oil was firmer, rising by $0.56 per barrel, closing at $57.60 per barrel. The Oil and Gas Index (XOI) rose 10.88 points (1.19%), closing at 923.66

  • ConocoPhillips (COP) +$1.37 (2.31%) to $60.57;
  • Repsol YPF (REP) +$0.52 (1.91%) to $27.77; and
  • Kerr Mcgee (KMG) +$1.37 (1.81%) to $77.03.

The Oil service stocks (OSX) Index rose 5.45 points (3.72%), to end the session at 151.96

  • Halliburton (HAL) +$2.82 (6.07%) to $49.24;
  • Noble Corp (NE) +$3.20 (5.24%) to $64.24; and
  • GlobalSantaFe (GSF) +$1.94 (4.66%) to $43.59.
Energy Complex
Reuters CRB308.13-3.15-1.01%
Crude Oil Light Sweet57.60.560.98%
Heating Oil1.6390.010.58%
Natural Gas7.6090.040.52%
Unleaded Gas1.6750.031.88%
AMEX Oil Index923.6610.881.19%
Oil Service Index151.965.453.72%

Currency Markets

USD Exchange Rates
US Dollar Index89.880.210.23%
Australian Dollar0.7512-0.0026-0.34%
Swiss Franc1.29950.00550.43%
Canadian Dollar0.8203-0.0012-0.15%