Wednesday, May 05, 2010

Market Wrap: Market Not Celebrating Cinco de Mayo

The markets were lower again today, although there was a mid-day rally that brought the indexes into positive territory, but it didn't last. The main culprit was the macro picture, which trumped any economic data or earnings reports.

By this I mean the big picture focus coming out of Europe. The Greek bailout package is being viewed as the tip of the iceberg, and countries like Ireland, Spain, etc. are quickly becoming problems of their own.

The selling of their bonds, and the simultaneous purchase of credit default swaps on those countries is eerily similar to the way big traders shot against the investment banks in 2008. I'm not trying to be a conspiracy theorist, but its painful to watch.

The flip side is that all of this negative news is spooking investors, and causing them to rush out and buy puts to hedge their downside risk. I say this is a good thing because every correction we've seen since the bear market bottom has found support around the time that bearish sentiment began to spike higher.

Today, the VIX spiked as high as 27.25, matching its January highs, before trading lower into the close. Options players were equally as skittish. The ISEE call/put ratio hit a new 52-week low at 65, and the CBOE put/call spiked to a somewhat extreme reading at 1.15. This might not mark the bottom, but it is a start.

Additionally, the news out of Europe pushed the euro down to a new 52-week low of 127.85, and the dollar rose in turn. The stronger dollar weighed on commodity prices, in addition to fears that all of this will slow down economic growth. Oil fell to below $80, copper and nickel prices plunged, as did silver. Only gold gained ground as a flight-to-safety trade, as I have mentioned.

Energy and industrials sectors led the downside, while healthcare bucked the weakness.

The 10-yr yield fell to 3.55% amid worries of a slowdown; and the VIX finished +4.5% at 24.91.

Trading comment: I added a little bit to some of our gold positions today, but that was about it. But I will probably look to put a little of the cash I have been sitting on to work tomorrow. I think the market is short-term oversold, and will likely bounce. But after that it will likely come down again, which would present a better buying opportunity for more than just a trade.

long GLD


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