TGIF: Market Bounces After Govt. Measures

The Senate passed its version of the financial overhaul bill yesterday. This morning, the market opened sharply lower, but it could have been exacerbated by today's options expiration. The markets quickly bottomed, and have since rallied back into positive territory.

Despite the whipsaw volatility, the volatility index (VIX) is on the decline, and that's a good sign. It spiked to as high as 48 early this morning, but has since reversed lower, and is currently down -8% to roughly 42.15. I would like to see it get back down below 30.

The euro is also bouncing after Germany's lower house approved its part of the EU's rescue package, and traders cover shorts amid speculation that the ECB could intervene to support the euro. While this may have the short-term effect or reducing uncertainty in the market, the bigger picture is more govt. involvement in markets and the economy, and that has never been a confidence inspiring move for investors.

Despite the lower dollar, commodities are weak as global participants continue to look to reduce risk. Oil is trading down near $70, while gold has fallen back to $1178.

The 10-year yield is also lower. It tested the 3.10% level early on, and has bounced back to 3.18% so far.

The financials are leading the action on this morning's rebound, up +2.68%; defensive sectors like consumer staples and utilities are lagging, and are lower by -0.57% and -0.67%, respectively.

Asian markets were mixed overnight. China bounce back +1.1%, while Japan fell -2.5%.

Trading comment: Many traders have been watching the "flash crash" lows in the S&P, which was 1065. That level was breached during this morning's dip, but we have since recovered those levels. I think a more important level to watch is SPX 1044, which marks the lows from February.

If the SPX breaks below its Feb. lows, it will mark the first "lower low" on the charts since March 2009. That would be a significant change in character for the market. Conversely, the market has also made higher highs on each rebound since March 09, but if we can't get back above SPX 1220, which is a tall order right now, that would also be a notable change.

Right now, I am planning on using any significant bounce in the market to get a bit more defensive. I'm glad that I raised cash back when I did, but big picture I will be looking to reduce our equity exposure a bit, and add to some safety areas like select fixed income.

While many participants are looking for lower levels this summer, I would not rule out a wide trading range to persist as well. So the range from SPX 1044-1220 are the levels to watch right now.