This is part of an e-mail I received earlier this week, it might help a bit with understanding options, especially at this VIX low point>
My analysis of the near-term situation is as follows -- the market can do one of two things -- it can rally. If the market rallies the Dow might even go to a new high above its March 12 peak of 10632.35. But if the Dow does advance to a new high, it's highly doubtful whether the Transports would confirm. So a Dow rally to new highs would not be bullish -- unless the Transports confirmed.
The second possibility is that the market will decline from here. If it does, I'll be watching to see how much damage is done. A decline from here would probably see the Transports breaking to a new low below 2817.23. A new Transports low would simply confirm the weakness in the Transports and would even be a stronger indication that the market had built a top.
I've gone into detail regarding the Industrial/Transports relationship because it's something you probably won't read or hear about anyplace else. Yet it was the Transports in early-March that provided the first hints that something was "wrong" in the price structure.
From a fundamental standpoint, what could the weakness in the Transportation Average be telling us? My own guess, and it's strictly a guess, is that the Transports are telling us that US consumers are starting to pull back on their frenzied buying.
Yesterday a number of retail store reported that sales had backed off. Wal-Mart, the bellwether of mass retailing, gapped down yesterday, closing below 60. WMT was lower today. On my computer I show 30 retailers with up-to-the-second prices on each -- from BBY to COST to ANN to MAY. Of the 30 retail stocks, 28 were down this morning.
My take on the situation -- manufacturers may be building inventory but US consumers are starting to cut back and when consumers cut back on their buying -- the shipping of goods also declines. When shipping declines, it shows in the Transportation Average. And that's what I believe is happening, and that's what I believe the lagging, non-confirming Transports are telling us.
At any given time in the stock market, the best bet is that the market is in a trading range. Option writers know that the market, any market, will spend two-thirds of the time in a trading range. Which is why option-sellers tend to make money and option-buyers tend to lose money. Trading ranges kill option-buyers because option buyers are betting on movement. A trading range is another way of saying that an item's movement will be limited. |
