True Follow-Through in Volatility is Needed

Since our last post markets were in full bear mode, however in the last week, markets started to drift up, in fact the S&P500 got closer to the 950 level which we have said again and again that there was no turning back to this level. This Wed the S&P500 managed to reach an intraday high of 928 at mid session, however, unlike many renowned market commentators and strategists that in the light of this recent rally have quickly flipped positions and decided to go bullish, we decided not to throw in the towel, stay silent and among other things analize and contrast the many different volatility indexes, cause always remember dont just follow the VIX, following only one can be misleading like it occured this week. For instance, on Wed the VIX dipped below the psychological 25 level only to end the session more or less back where it started, quite contradictory indeed given that markets rallied that day. Lets recall that despite the collapse of volatility last week, this week it has stayed pretty flat despite markets trending up, so this should have raised red flags.

The real key however lies in the VXO which has been the only index which has managed to withstand all the heat and stay in the 24 level all throughout the week.

So where do we go from here? Some purist technical traders are confident that today´s close firmly below the 200 day SMA implies that this might be the real thing. We continue to be bearish but we must carefully monitor volatility next week and any signs of divergence. Certainly they have certainly picked the perfect day for a brutal selloff, todays job number was bad, but we got a preliminary number yesterday so it was a given that the number was going to be bad. It just seems the perfect reason added to the 4th of July long holiday which adds more significance and uncertainly, now traders, investors, strategists, day traders, etc., have 3 long days to ponder over the economy and the validity or not of a straight 4 month rally.

We have seen in the past volatility shot up over 6 or 7 percent in one day, so we are not very impressed cause we can be back to where we started if next week, volatility starts to weaken again. What is clear is that we have a clear and very firm floor in the major volatility indexes which will prove very difficult to penetrate. Looking at the S&P500, the future now stands at 893.75 and we can expect to see further weakness till it reaches 888, it is just 5 points, which can be done at the open on Sunday most likely. What is clear is that there is no better excuse to attempt a continuation of the bear trend than what we saw today.