Thursday, July 23, 2009

Markets Rally Yet Volatilty Stalls?

The major reason we have had a significant rally in the averages is the fact that volatility as based by the CBOE VIX had exploded earlier in the year. Many investors and traders rushed to buy puts and portfolio insurance during the OCT/NOV correction. That was also the trade earlier in the year. Like all things good or bad, there is an ending. All that portfolio insurance now needs to either be rolled over or unwound. Volatility and options premiums were simply too high and needed to be sold or offset.

The continuous selling of such options premiums has pressured the VIX, VXN, and VXV lower, which in turn rallies equity prices.

Usually when we see higher Futures/Index prices, we also see a corresponding lower VIX, because when the market goes up, people don't hedge their gains, they let them ride. Typically when markets drop the need for portfolio insurance increases.

So today, I do notice a divergence in this theory.

A Higher VIX.

I would think as the market rallies higher, more options premiums would be sold, but not today. Are investors buying back sold premiums and hedging stock market gains today?

A Higher Cash Market.

The market looks to hammer the shorts, as we break through resistance.

Higher Futures

Looks like someone is seriously short the September Futures, as stops are being triggered on the upside.

Sooner or later options premiums will get cheap. The market looks great technically although its over bought short term. They may just take the SPX to 1000, which is a nice whole number.

Today's action looks like a classic squeeze the shorts into a blow off top type of rally.

May I add recent gains or so in the Dow/SPX has been made by Tech, Materials, Biotech, and Pharma?

Where are the Financials ex Goldman?
Where is Energy?
Where is Retail? Especially Wal Mart doesn't seem like it can rally.

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