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To all HOTS Subscribers:
Say hello to volatility! After months and even years of low intraday ranges, we are finally experiencing wild swings in major equity averages. The VIX (volatility index) is trading above 16, which market participants for many years considered an extremely low level but have now come to view as extremely overbought. I mentioned in the last HOTS Update that the persistent selling pressure is considerably different than prior sell-offs over the last 3 years. This makes me wonder if the market is trying to price in something that the financial media have not yet talked about yet. We are all aware of the concerns facing the market, such as inflationary pressures, rising short-term interest rates, potential consumer difficulties, over-priced real estate, fiscal deficits and high energy costs. None of these is a new development. So what, then, is new? Answer: Political problems! 99% of the time, it is a poor idea to base trading decisions on political developments. However, with several top members of the governing party of the most powerful global economic power under investigation and the probabilities increasing for major indictments, it is beginning to concern the investment community. I am not here to express my political view. Further, I am aware that half of our readers think that what is happening is an attempt of an opposing party to regain control, while the other half thinks that the White House will finally get what it deserves. The point is that these investigations might escalate in the near future and the market, which appears very uncomfortable with this new uncertainty, is reflecting it in the tape’s price action.
Market action over the last week looks like a corrective volatile chop after an initial decline from the beginning of October. Buying pressure is almost non-existent, and the rally attempts we have experienced were mainly driven by short-covering. Despite the fact that several sentiment measures have approached levels associated with bottoms in 2004 and 2005, the market internals and price action are very different from the rally off those bottoms. Another important fact is the apparent complacency in the face of this price action, as the main dispute among traders over the last couple of days appears to be whether to buy now or buy 1% or 2% lower. Frankly, I do not hear the word “sell” which could be become a big problem. Short-term rallies will likely continue to be a part of this market, but based on my indicators, I believe that we are nowhere near an important bottom and we want to be on a short side of this market. The two trades today directly reflect these views.
Dennis Leontyev
Options Strategist and Editor
HamzeiAnalytics Options Trading Service (HOTS)
Say hello to volatility! After months and even years of low intraday ranges, we are finally experiencing wild swings in major equity averages. The VIX (volatility index) is trading above 16, which market participants for many years considered an extremely low level but have now come to view as extremely overbought. I mentioned in the last HOTS Update that the persistent selling pressure is considerably different than prior sell-offs over the last 3 years. This makes me wonder if the market is trying to price in something that the financial media have not yet talked about yet. We are all aware of the concerns facing the market, such as inflationary pressures, rising short-term interest rates, potential consumer difficulties, over-priced real estate, fiscal deficits and high energy costs. None of these is a new development. So what, then, is new? Answer: Political problems! 99% of the time, it is a poor idea to base trading decisions on political developments. However, with several top members of the governing party of the most powerful global economic power under investigation and the probabilities increasing for major indictments, it is beginning to concern the investment community. I am not here to express my political view. Further, I am aware that half of our readers think that what is happening is an attempt of an opposing party to regain control, while the other half thinks that the White House will finally get what it deserves. The point is that these investigations might escalate in the near future and the market, which appears very uncomfortable with this new uncertainty, is reflecting it in the tape’s price action.
Market action over the last week looks like a corrective volatile chop after an initial decline from the beginning of October. Buying pressure is almost non-existent, and the rally attempts we have experienced were mainly driven by short-covering. Despite the fact that several sentiment measures have approached levels associated with bottoms in 2004 and 2005, the market internals and price action are very different from the rally off those bottoms. Another important fact is the apparent complacency in the face of this price action, as the main dispute among traders over the last couple of days appears to be whether to buy now or buy 1% or 2% lower. Frankly, I do not hear the word “sell” which could be become a big problem. Short-term rallies will likely continue to be a part of this market, but based on my indicators, I believe that we are nowhere near an important bottom and we want to be on a short side of this market. The two trades today directly reflect these views.
Dennis Leontyev
Options Strategist and Editor
HamzeiAnalytics Options Trading Service (HOTS)
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