Marketview: Volatile Judgement
- Posted by DynamicHedge
- on February 9th, 2013
A light economic calendar punctuated with improved trade balances in the US thanks to reduced energy imports. The Chinese economy signaled some expansion with imports and exports rising. The unfortunate news is that Euro-absurdity is back on the agenda. The Spanish government finds itself embroiled in an illegal funding scandal reaching the highest executive levels (Rajoy) while the country enjoys a 27% unemployment rate. Meanwhile, Silvio Berlusconi is running a dangerous Euro-skeptic anti-German propaganda campaign leading up to (likely hung) Italian elections. These problems seem to be mostly political circus, yet the European equity markets are reacting with sharp declines. Keep in mind, the EU was able to pass a long-term budget deal, and Draghi reiterated his dovish stance in the latest ECB press conference.
Domestic markets also saw an uptick in volatility after a couple sleepy weeks. This is one of the warning signs we highlighted a few weeks into the rally as an indicator of markets topping out. The option is still open for further upside as breadth and internals remain healthy. So far the broadening range in the S&P has resolved higher. This can mean that that indecision between bulls and bears at 1500 is over with the formerly-contested price point now an accepted value area. It could also be the typical uptick in volatility we see preceding a selloff combined with a maddening fakeout to the upside.
Rotation this week was not definitively bearish, but it certainly was not constructive. Consumer staples, technology, and energy led the way while financials, materials and utilities lagged.
Watch $SPX 1495 and keep an eye on the February highs in the $VIX. If either are breached it could signal the start of some downside pressure. The majority of our indicators remain bullish but we would not be adverse to a long-awaited pullback.
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DynamicHedge is an equities, futures and derivatives trader based on the West Coast. He runs a long/short opportunistic relative-value strategy within a proprietary trading group. More
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