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Don’t Panic from the Pullback… Profit from It! |
By Alan
Knuckman
January 29, 2010
Investors are scared right now, and rightfully so… Last week’s violent
pullback in the markets reminded battle-scarred shareholders that our
latest rally is anything but guaranteed. In the past 12 months we’ve
witnessed a massive decline in market fear, but with last week’s
market movement some of that fear volatility has returned.
But one
thing I’d like to stress in today’s Sleuth, with the
Volatility Index ($VIX) around 25, is that I believe we’re still at a
reasonable level of volatility — and if anything, last week’s
correction was long due.
The sell
off was the worst since March 2009 with a 5% drop in the last three
days of the weak week. Put in perspective, though, 15 Month S&P highs
were made Monday January 19 — only a few trading days ago.
My focus
lies on the recently humbled physical commodity markets that were down
6.5% as the raw materials sector retreated on Chinese concerns. Their
coordinated announcement of slowing growth from the official 10%
latest quarter GDP jump is designed to temper inflationary pressures —
but contrary to some published obituaries the Red Dragon is still very
much alive.
Last week
has definitely gotten our attention but remember we have seen this
action repeatedly before. For the last 10 months, every time the
market looks like it will turn down it has responded with a rally to
new relative highs. Take a look:
One
component in pricing for the options that my
Resource Trader Alert readers invest in is volatility.
For our purposes it helps us determine simply to buy an outright
option if price are cheap or to purchase a spread if expensive (in
relative terms). An increase in volatility is an increase in price
movement — and don’t forget we need the markets to move in order to
make money on our positions.
Stocks had
slowed in the last couple of weeks and the $VIX, which measures the
S&P 100 stocks, was solidly below 20 and as low as 16 January 11. No
fear, no movement as you saw quiet market conditions with tighter
daily trading ranges while the market searched for a catalyst for
prices.
Earnings
have begun once again feeding the beast with its necessary diet of
market information to digest. Banks have been permitted to make back
some money from interest rates held low by the Fed. They had to make
some money the old fashioned way: they Earned it with the risk free
policies of the Central Bank allowing them to replenish their dwindled
cash coffers.
Is This Just a Pullback, Jack?
After any
turnaround (in any market), traders look for price support. The logic
is to start small with not making new lows for an hour, then a day,
then the week. For example, the highly traded e-mini S&P 500 futures
declined to 1089 in today’s session but not below Friday’s lows at
1086 and reversed to move higher on the day.
As a group
commodities have done much the same with Gold and Oil closing higher
after testing last weeks lows. Crude actually made a lower low at
73.97 Monday for the March contract but closed higher on the day which
is a positive technical sign with that reversal on lower volume than
Friday.
Another
clue can be taken from the action in Treasuries, which benefited from
the stock uncertainty last week. 30-Year Bond futures are off by
nearly half a basis point as some fear has subsided in the short term.
The next round of market volatility will tell us a lot about the
market’s future direction.
It may be
cliché, but my nearly 20 years of experience makes me most afraid when
others are not and gives me a sense of calm when the public is frantic
and unhinged.
This from
Bloomberg:
“Traders are piling into bets that the biggest sell-off in U.S.
shares since March will increase stock market volatility, pushing
call options on the VIX Index to the highest level in 19 months.
“The
VIX jumped 55 percent to 27.31 in the last three sessions, the
biggest surge since February 2007, as demand rose for options to
protect equities from losses. Futures show traders are betting it
will remain above 25 for six months after averaging 20.29 over its
two-decade history.
“The
VIX had its biggest annual drop ever in 2009, falling 46 percent, as
the smallest stock-market swings in two years reduced the value of
equity derivatives. The gauge is still down 66 percent from a record
80.86 in November 2008.”
These
emotional inputs have been successfully interpreted and managed within
my readers’ disciplined
RTA trading plan through ups and downs. Risk is always
quantified and controlled with our strategies and that does not change
as volatility increases, but opportunities do. We’re going to take
advantage of those opportunities going into 2010.
It all
comes back to commodities,
Alan Knuckman
Editor’s Endnote:
If you’d like a risk-free shot at joining Alan’s exclusive group of
readers — and a peek at his incredible full track record for the last
year —
just click here…
Editor’s Endnote:
Remember to send all of your comments and suggestions for the
Penny Sleuth to
editor@pennysleuth.com.
