Wednesday, August 22, 2007

Is Everyone Trying To Game The Next Pullback?

The volatility index (VIX) has come down sharply from its spike higher last week. This means traders are pricing in a bit calmer markets going forward. And the news in the credit markets today, with the big banks borrowing at the disount window, should also be easing investor concerns.

But looking at the put/call ratios, you get an entirely different picture. The market has been up for several days following the lows from last Thursday. But the CBOE put/call ratio is at an extremely elevated level of 1.23. And the ISEE Index is equally as elevated at the put/call equivalent of 1.18. So what gives?

It would seem that too many traders are using the same playbook, and trying to game the next, potential pullback in the market. I am guilty of this as well, as I have been talking about such a "retest" after an oversold rally takes place.

But if everyone is trying to get in ahead of this event, it makes me think that any pullback could be more shallow than might otherwise be the case. And with the Fed having lowered the discount rate and changed its bias, we now have the new 'Bernanke put' active as well.

Kind of makes you go hmmmm...


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