Friday, May 07, 2010

Freaky Friday: Volatility Rules The Day

After yesterday's wild ride, investors were noticeably jittery today. Actually, some of yesterday's errant trades were cancelled by the exchanges, so I don't think in reality the market was actually down as much as it looked like. But that's a little inside baseball.

Today, the day started off with a much better than expected jobs report. The nonfarm payrolls report showed the economy added 290,000 jobs, far better than the consensus of 187,000. And the previous month's report was revised to show more jobs added as well. On a normal day, that would have induced a huge rally. But not today.

The market actually rallied a bit early on, and it looked like we might be okay today. But the euphoria quickly wore off, and the market swooned. This occurred two more times during the day, where the market rallied back to flirt with positive territory, but then traded back down. Talk about volatility.

The chart below shows the huge spike in the volatility index (VIX). The VIX has simply exploded the last 2 days, in an almost breathtaking fashion. I think the only other time I have seen a move like this was September 2008, which is not a fond memory.

Today the VIX spiked +25% to close just shy of the 41 level, the highest level since just after the March 2009 lows. Normally, a spike in fear of this magnitude would likely signal capitulation, and a buying opportunity could be close at hand. But the credit angst emanating from Europe, and the size of the sovereign (govt.) debt issues makes me want to be cautious in here, despite the contrarian signal we are getting from the sentiment indicators.

The fear is present in the options market as well. The CBOE put/call has closed above the 1.0 level for three consecutive days. And the ISEE call/put has made three consecutive 52-week lows, today closing at just 57. This likely means that we are pretty oversold, and should at least bounce.

Trading comment: I picked at some of my favorite growth stocks, which I have mentioned many times on this site, to play for a bounce next week. The ECB should come out with some news over the weekend about financial support they plan to provide. I just hope its enough to spark a rally. So that's how I'm playing it.

But I want to be careful in that these buys are just for a trade. I think the market should bounce from this week's shellacking (-6%), but the nature of these big spikes down is for the market to bounce, but then come back down again to retest the lows. This is the bottoming process, and even if we have seen the low levels (which I doubt), we still haven't spent enough time correcting, so caution is warranted.

Happy trading, and have a peaceful weekend--


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