Volatility Takes Off

Nothing really out of the ordinary happened today, only that markets suffered their 2nd consecutive day of losses, a little over 1% for both the Dow and Nasdaq. A what appeared to be a real good reading for housing starts which was released an hour before the market opened as well as a slower increase of wholesale prices in May "apparently" wasn´t enough to counteract both a fall in capacity of utilization which in fact reached a 42-year low in May, along with a steeper-than-expected 1.1% fall of U.S. industrial production. We used the word "apparently" because regardless of which statistic was good and which one bad , markets would have sank anyway today. What really counts however is the spin that the media gives to the figures and how they are covered that determines which one of them is more important in any particular trading day. As for today, its pretty clear that industrial production and capacity of utilization won over housing, but had the markets rallied then the focus would have been on housing. If we were to ask an economist and lay before him or her these pieces of data, and him or her to make a prediction of what the markets would do today based on those figures, most likely he or she might conclude that markets might rise since after all a slower than expected rise in prices is the real deal isnt it? Inflation creeping up is probably the single biggest threat that the US economy can face. Fair enough, the economist made his or her pick but they later found that the markets didn´t rise as they had predicted, they actually fell pretty bad, so wheres the catch? After all, aren´t economist supposed to know better than anyone about the economy and financial markets. Well, it turns out that if one were to watch a financial news channel right at the moment that the market were enduring the worst losses of the day, surprise, surprise, one probably ended up watching a financial roundtable discussion full of market commentators and some market strategist having a difficult time twisting the inflation argument and moving from an inflation bias to a deflation one... Will the media ever put a case to rest? If the media is uncapable of explaining every twist and turn of the markets, at least they should not disinform the public.

So what really happened today in the markets that turned the market upside down again today? Again, the real story of the day was once again driven by the extreme fear in the marketplace, fear that are driving people straight to put options. In fact, volatility climbed over 5% today and the VIX is less than two points away from the very critical resistance level of 34.57, that magical level which we mentioned to in a previous post.

So looking ahead to the days to come, if we take for granted that the 34.57 level will be tested at some point probably tomorrow, what can possibly lie ahead for the markets in this "quadruple witching" Friday, cause markets seldom do what people expect them to do, and if markets have started the week with heavy losses, you should expect the unexpected. Actually, if we hadn´t started writting this blog two weeks ago with a clear bearish stance, we would probably be wise and unwind all of our positions as of late Thursday and decide to "go fishing" on Friday, however we can´t do that this time. If we assume that there is no turning back for the markets, that the 950 level wont happen anytime soon, then the only clear answer is for markets to waver about tomorrow and thursday and break above the VIX resistance level on Friday on heavy volume, and we say heavy volume, which is something we haven´t seen in at least a month, and as we all know is the piece missing in this puzzle which would give credibility for any sustainable market move.

Below is a one month DJIA daily chart with a 200 day Simple Moving Average which shows the day when price closed above which for purist chartists is a bullish sign. To us, a 200 day MA is no better than a 202 or a 210, in fact we have never included this type of analysis in our models, nevertheless they are closely watched by strategist and of course by the financial media. In the last two days we have had a close below the MA, despite last week been above the line, does this mean that the 3 month rally since March has lost its validity?