Hank, i was pm'd today by someone who asked me to comment on the wild gyrations in the VIX...so i'll combine this with your request. first of all, the manic swings in the market were mirrored in the options pits, where frantic call buying was the order of the day, actually beginning yesterday. from a sentiment analysis standpoint i'd say that the quick collapse in the VIX and the p/c ratios is a hint that traders are getting too optimistic too fast. if the rally that began after the PPT defended Dow 10K on Monday had been greeted with a dose of skepticism by the options traders i'd be inclined to think that it has some legs. however, since the mood has swung from despondency to euphoria within three days, the rally is suspect. this view is supported by the extremely poor internals that have accompanied this advance. both the a/d line and NH/NL continue to look horrible.
the bond market has made no progress in spite of what could be construed as a bullish trade report (it wasn't bullish in reality, but should have been perception-wise since it came in below expectations). transportation and utility stocks continue to sink and broad-based small and mid-cap indices severely underperformed.
all in all i'd say the bulls have not much reason to get complacent yet, but that seems exactly what they are doing.
another point of note is the fact that European bourses were stuck around unchanged all day, some actually moving lower by the close, in spite of the huge rally in the spoos which they usually slavishly follow.
ny guess is that the Europeans are pre-occupied with the very real possibility of a rate hike by the ECB to-morrow. while that's not a done deal as of yet, there are certain voices within the ECB (Welteke, Issing) who have expressed both concern with regards to inflationary pressures and the possibility of asset bubbles (what's that?) forming. apparently they are not too keen on falling into the bubble trap into which the Fed has maneuvered the U.S. economy.
i'd say, IF the ECB hikes tomorrow (the Italians will try to keep it from doing so, but may not succeed this time around) today's euphoria will be gone very fast.
sobriety and lower prices will once again reign...
one thing worth mentioning that's somewhat favorable for the bullish case is the current position of the ST cycle, which still points up into early November. however, the market has recently turned down twice in the middle of supposed up cycles and could do so again.
judging from the merry collapse of the spoos in Globex trading we may see a sell-off right out of the gate tomorrow.
we will have to monitor carefully how such a sell-off is received...if the euphoria dissipates quickly we may get nothing more than a re-test of the lows. otoh, this market hangs by a thread, as the wild swings in confidence attest to. sharp increases in volatility near a market's highs are almost always a sign that extreme caution is warranted. |
