Thursday, March 8, 2007

PM Market Comment

One of the big accomplishments of the bulls today was getting the Volatility Index back below its 10 day moving average for the first time in a couple of trading weeks. This swings the VIX into the column of bullish factors for the stock market, and moreso bullish for stocks if the VIX can fall further. But this chart from last summer's swoon tells the cautionary tale that the first volatility inducing leg down in the market wasn't the last and that 2nd leg down in the market was accompanied by an even sharper surge in the VIX. This is why I am sticking to my expectation that we will take last year's highs out on the next retest of the recent lows. This drop below the 10-dma for the VIX may prove temporary if the market behaves as it normally would and retest previous ows. History doesn't repeat itself exactly in these markets (and who knows what jury rigging is going on behind the scenes to keep it up), but as Twain said, history sure does echo.

What would convince me more that history ISN'T going to repeat itself and that another larger leg down won't appear f0r the market is if we see the VIX substantially pierce the 200 day moving average which is 12.98. We're already close with the VIX finishing today at 14.37. If we get a sudden close below the 200 day, then it may really be time to better appreciate the global liquidity phenomenon (and whatever else may be going on at the Treasury, or the NY Fed) and throw in the correction, or bearish towel.

But clearly we've got a market that recognizes the risks. At just before 2 p.m. put a one line headline out:

13:56 EDT
NEW New Century-NEW speculation company may file for Chapter 11 is circulating-Rumor

Undestand that theflyonthewall's headlines are seen on major trading desks everywhere because its headlines flash on the Bloomberg Terminal. I've got to believe that the headline took the market off the highs. Here's a 5 min chart of the Dow today - notice what happens at just before 2 p.m. ET:

It makes you wonder what happens to the market if a subprime lender the size of New Century (NEW) actually ever does file (separate post coming).

Still, the major indices moved higher, including a Dow rise of 68. As noted last night, I had wondered if the market would drift ahead of tomorrow's employment numbers. Well, with the strong start, it did more than drift, but volume again meandered. The rises of the last few days would have a lot more meaning if they were accompanied by heavy volume, but volume ahead of tomorrow's data has trailed off sharply.

All roads lead to tomorrow morning 8:30. Today's light volume is sure signal that the market was marking time today waiting for employment and inventory numbers.


nathan said...


Your blog is the best one on my list of daily reading, hands down.


Jim K said...

Thanks, Nathan

65Trader said...

Since you mentioned jury rigging, I wanted to ask you a question. Since you seem to be well-connected and have plenty of experience on the street, do you have any opinion on the so-called plunge protection team? Do you think it exists, and if so, what is it's impact?


Jim K said...

65 Trader. It wouldn't surprise me. If it does exist it would be very easy for it to set up a futures spread and go from there. Robert Heller, former Fed gov, strongly advocated something akin to a PPT. Maybe I will do a post on this sometime.

Kevin said...

Hi Jim,

I was trading the market at 2:00 today and you're right, NEW's headline did cause the market to sell off.

Before NEW's headline hit the tape, I noticed NEW and LEND moving lower while the market was still going up. Something didn't seem right to me, so I shorted LEND,CFC, NDE, and a few brokers like MS. About 10 minutes later the headline came across. The trade worked for a quick scalp. New's headling was definitely what caused the market to move lower in the afternoon.

By the way, great coverage on this group of stocks and the carry trade. You commented last month that the yen carry trade could take this market lower and you were right. Nice work.

Jim K said...

Nice job on that scalp today! Barronsonline pounding the table on CFC... that should be a great contrary indicator. lol. Yen carry trade has a ways to go to unwind, but lo and behold, Agent Paulson makes a quick trip to Asia and bingo... Yen rise stopped, Asian stock markets up, U.S. markets recover. Neat how that works out.