Monday was a monster up day – yet another 90% up day. That’s two 90% up days in the last three trading days, which means that the market is short-term overbought and due for a correction of at least one day (S&P futures are down about 10 points in Globex trading tonight). That now makes seven “90% days” – either up or down – in the last 10 trading days.
This decline has been one of the swiftest on record, coming from a period of relative calm and even somewhat positive technical indicators. The selling that has taken place in the last two weeks can only be described as panic selling, for the most part.
$SPX declined sharply below its 20-day moving average (see feature article), and as such is quite oversold.
So far, there is support on $SPX at 1100 to 1120 -- the daily lows of this week.
The market, after some nasty downside fakeouts, finally staged the oversold rally that we – and many others – had been expecting. In slightly less than an hour and a half, $SPX rallied roughly 80 points! Earlier in the day, a rally had been underway also, but it was a nervous one as the market awaited the comments from the Fed after the FOMC meeting.
It is almost unfathomable to think that, exactly a mere two weeks ago, $SPX was at 1345 and there were thoughts that an upside breakout was possible. Now, two weeks later, in a move that can only be described as panic, $SPX is at 1200 with no floor in sight. Oversold conditions have ballooned to near-historic levels in some cases, but as the last few trading days have shown, "oversold" does not mean "buy."
Theoretically, there is $SPX chart support in the 1180-1200 area from last November.
With the current uncertainty in the stock market, the $VIX index has once again received a lot of financial media coverage. Last week we recommended the purchase of $VIX calls as a hedge for your portfolio. We received numerous comments from people who took our advice but didn't seem to understand how $VIX options price.
Suddenly, the stock market started to develop "religion" about the U.S. debt situation, and sold off sharply this week.
In one sense, this is like any other "event" -- an FDA hearing or a potentially volatile earnings report: the underlying has trouble moving decisively in either direction until the event has passed.
There has been something of a “buzz” in volatility forums and in some media articles about a backspread strategy that is designed to take the loss out of using $VIX options for protection or speculation. As you know, we are running a “perpetual call buy” strategy for long $VIX calls (Position S610). Also, this week we recommended the purchase of $VIX calls as protection for stock portfolios, for those who were worried about what might happen in the event of a downgrade of U.S. debt or a failure to raise the debt ceiling.