Wednesday, August 10, 2011

Volatility Picking Up

The market is lower again today following yesterday's strong rally. The market sold off following the FOMC's announcement yesterday, but then the Dow rallied furiously into the close, tacking on 600 points in a little over an hour. At the close, the stock market had put together its best single-session since March 2009.

But this morning the attention has once again turned to Europe, and the fears about strains on their banking system. Today the worry is focused on France, whose large bank stocks are taking a hit. Investors don't like banking crises, so the nervousness is understandable.

As for the volatility index (VIX), it came down sharply yesterday back down to the 35 level. But today it is up over 20% again and topping 43. Its high close was Monday at 48.

A lot of comparisons have been made between the market this year vs. the market in 2008 or 1987. I tend to think it is more like 1987 as opposed to 2008. Our banks and companies are much better capitalized today than in 2008, there is much less leverage in the system, and the real estate bubble is behind us not in front of us. We have had a shock to the markets, a la 1987, but the remainder of the year should be more of a trading rangebound environment, imo.

Asian markets were able to muster small gains overnight, but not as strong as our bounce yesterday.

The dollar is up today, but that is not hurting oil and gold. Oil prices are just over $80, while gold has once again risen to new highs near $1779.

The 10-year yield has now fallen all the way to 2.11%. Yesterday the FOMC said it would hold rates at low levels until mid-2013. For bond traders, that meant they now know with certainty that interest rate hikes are not coming, and that gave them confidence to rush into longer-dated Treasury securities. The downside is that the hunt for reasonable yields just became even tougher.

Trading comment: As I mentioned the other day, we used yesterday's bounce to trim some underperforming positions. You don't have to try to catch the ultimate low in the market. Usually the market hits a low, stages a nice bounce, but then comes back down to retest the lows. And it is on that retest that one usually finds a better, lower-risk buying opportunity. So we want to remain defensive, and hold above average cash balances until we get to that point.


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