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Holy Volatility!

  • July 16, 2002
  • Dan Chesler

What
a day yesterday. I haven’t seen
volatility like this in a long time. Sweat
beads still fresh on my forehead. 


The
bad news: My recommended protective stops were taken out on both long trades
from last week (long in the SPY and QQQ). The good news:
It looks like the market gods saved our ASSets from
complete and total destruction, one more time. 



I
drew a trendline on the weekly Dow Industrials starting from the low in August
1998, through the low of September 2001, to today’s low. 
We went right to the line yesterday, and then had what felt like an
historical reversal.

Intraday VIX levels swelled
to 43.7 and closed at 39.30, the highest intraday and closing prices since
September of last year. By day’s end,
the VIX closed beneath its opening price. This
configuration — new highs followed by a close below the open — is
bullish. NYSE volume
was again above average at 1.9 billion shares. The NYSE TICK got to negative 1316
intraday. That’s LOW in case you didn’t know. The stock market rallied for over a month following intraday NYSE TICK
readings of negative 1300 or greater in March 2001 and September 2001.

Trading volume in ETFs Monday
was extraordinarily high, especially in the
(
SPY |
Quote |
Chart |
News |
PowerRating) and
(
DIA |
Quote |
Chart |
News |
PowerRating). The only other times we’ve seen trading volumes of this magnitude in
the SPY and DIA were at intermediate-term bottoms, such as March and September
of 2001. There is reason to
believe that portfolio managers have been using ETFs, such as the SPY and QQQ,
at the expense of OEX puts and calls. Volume
trends in each of these markets confirm this view. Thus, the use of ETFs as an alternate hedging instrument makes total ETF
volume figures increasingly more important to our daily analysis. 

Eight of the 25 ETFs/indexes
I follow closed up yesterday, reflecting the narrowness of the reversal rally.
Healthcare, Telecom, Retail and Software all managed to hold
together fairly well compared to the SP500. We’ll need to see much better breadth and up/down volume ratios over
the next few days to keep the bulls happy. 

I know it’s difficult to
attempt the long side again, especially right after being stopped out of our long
yesterday. Thankfully we use
tight stops. However, for the
short term, the probabilities still favor the long side. Readers of my daily service are looking for long entries (again) in the
DIA and the BBH today.

Dan