Value of Perfect Information

Back from vacation, where the weather was as volatile as the stock market, I was happy to see little damage to my DITM covered call strategy, made whole by today’s rally. Although the VIX came off the 4 handle down to 36, the CBOE equity put/call ratio zoomed up to 74 – good for the market (as we saw today). NYSE new highs to lows were an incredible 33 to 1,296; 23/947 on the OTC. Both newsletter surveys – Inv.Intell. and AAII remained inverted, with more Bears. Insider selling to buying was a lowly 3:1 ratio. Money actually went into MMFs for the first time in a month; monthly data on ETFs showed money coming out of equity and international funds -level in bonds. The 2010 support level on the SPX (S&P500) held at 1100 -now trying to break resistance at 1200.

Quadruple witching (expiration of stock index futures, stock index options, stock options, and single stock futures) occurred with relatively low volume and volatility…

Recommendation:
Take no action.

Daily Trend Indications:

- Positions indicated as Green are Long positions and those indicated as Red are short positions.
- The State of the Market is used to determine how you should trade. A trending market can ignore support and resistance levels and maintain its direction longer than most traders think it will.
- The BIAS is used to determine how aggressive or defensive you should be with a position. If the BIAS is Bullish but the market is in a Trading state, you might enter a short trade to take advantage of a reversal off of resistance. The BIAS tells you to exit that trade on “weaker” signals than you might otherwise trade on as the market is predisposed to move in the direction of BIAS.
- At Risk is generally neutral represented by “-“. When it is “Bullish” or “Bearish” it warns of a potential change in the BIAS.
- The Moving Averages are noted as they are important signposts used by the Chartists community in determining the relative health of the markets.

Current ETF positions are:
Long at DIA $102.80
Long QQQQ at $44.76
We are long Oct $106 DIA puts at $185 per contract ($1.85 per share) on Friday, Sept 17th. (current bid = $195)
We are long Oct $48 QQQQ puts at $94 per contract ($0.94 per share) on Friday, Sept 17th. (current bid = $104)
We are long Oct $113 SPY puts at $231 per contract ($2.31 per share) on Friday, Sept 17th. (current bid = $258)

Daily Trading Action
The major index ETFs opened higher and peaked within the first ten minutes before moving lower for about another half hour to reach their low of the day. The rest of the session was spent see-sawing higher which gave way to weakness in the final hour of trading. A surge with a half hour left to go again gave way to weakness in the final fifteen minutes which ended with the Dow and S&P-500 lower, but only after their index ETFs went ex-dividend. This left all the major index ETFs posting modest gains. The Russell-2000 (IWM 65.21 +0.27) gained ground like the NASDAQ-100 with the Semiconductor Index (SOX 334.35 +0.11) posted a minor gain. The Bank Index (KBE 23.23 -0.19) lost most of one percent and the Regional Bank Index (KRE 22.39 -0.04) lost a nominal amount. Both bank indexes remain in trading states with BEARISH BIAS. The 20+ Yr Bonds (TLT 101.67 _0.41) posted a minor gain on above average volume. NYSE volume was above average with 1.227B shares traded. NASDAQ volume was above average with 2.410B shares traded.

There were three economic reports of interest released:
• CPI (Aug) rose +0.3% versus an expected +0.2% rise
• Core CPI (Aug) was flat +0.0% versus an expected +0.1% rise
• University of Michigan Consumer Sentiment (Sep) came in at 66.6 versus an expected 70.0
The first two reports were released an hour before the open. The final report was released twenty-five minutes into the session.

Quadruple witching (expiration of stock index futures, stock index options, stock options, and single stock futures) occurred with relatively low volume and volatility. Quadruple witching occurs quarterly and generally sees significantly greater volume. Measured by the fifty-day moving averages, volume was above average on both the NASDAQ and the NYSE but overall volume didn’t spike as much as it often does with quadruple witching. Volume is just beginning to return and we expect it to build over the coming week.

Healthcare and Materials were unchanged. Four out of ten economic sectors in the S&P-500 moved higher: including Industrials (+0.9%), Telecom (+0.6%), Tech (+0.5%), and Consumer Discretionary (_0.3%). Energy (-0.5%), Financials (-0.5%), Consumer Staples (-0.1%), and Utilities (-0.1%) moved lower.

Implied volatility for the S&P-500 (VIX 22.01 +0.29) rose a bit more than one percent and implied volatility for the NASDAQ-100 (VXN 22.26 +0.45) rose two percent.

The yield for the 10-year note fell one basis point to close at 2.75. The price of the near term futures contract for a barrel of crude oil fell ninety-one cents to close at $73.66.

Market internals were mixed with advancers leading decliners 3:2 on the NYSE and by 4:3 on the NASDAQ. Down volume led up volume nearly 5:4 on the NYSE while up volume led down volume 5:4 on the NASDAQ. The index put/call ratio rose 0.46 to close at 1.51. The equity put/call ratio was unchanged at 0.58.

Commentary:
Friday’s trading saw most of a stand-off between bulls and bears. The resistance levels we have been monitoring have been breached by the Dow and NASDAQ-100 but not yet by the S&P-500. The Dow also has overhead resistance at the 10,720 level from its August 9th high. The levels we are monitoring are:
Index Resistance Actual
Dow 10,590 10,607.85
NASDAQ-100 1,940 1955.83
S&P-500 1,130 1125.59

I will continue to monitor these levels and I am looking for topping action to occur shortly. The nature support is such that a shallow dip could be recovered from but a more drastic move lower could be profitable for short (or put) positions. The markets opened higher and we took the opportunity to buy put positions on the cheap as insurance for our long positions. With the major indexes in uptrend states with a BULLISH BIAS, probabilities favor a continued move higher. However, patterns are such that a sharp move lower is possible in the next couple of sessions and we would like to be protected from such a move. We will bide out time in our long positions fully protected by our puts for a couple of days.

US Dollar Index – Daily Chart

The past two months the dollar as been in rally mode. The last 14 days we have seen a large bullish pennant form and this pattern typically marks the half way point for the current tend. The measured move for the USD is pointing to 93 over the next few months.

Gold Futures Prices – Daily Chart

Gold as we all know is seen as the major safe haven and the price per ounce has been steadily climbing. Friday we saw the major indexes sell down very hard but both the dollar and gold posted some solid gains. Gold does looks as though it needs some time to digest the recent move higher and this could take a week or two before anything exciting happens but I am on the lookout for low risk setups.

VIX – Volatility Index – 60 Minute Chart

This index measures the fear in the market. When fear is high and everyone is selling their positions we see the VIX jump in price. Over the past month we can see a possible Head & Shoulders pattern forming. If this pattern unfolds like it should then we will see the price of equities bottom in the coming week with the VIX dropping below the blue neckline. The old saying is “When the VIX is High is time to Buy, when the VIX is low its time to Go”.

Put Call Ratio – 60 Minute Chart

In short, when the put/call ration is over 1.00 then there are more traders/investors buying Put Options than Call Options. Put options are when people are buying leverage to take advantage of lower prices. My thought/opinion about this is when more people are trading with leverage anticipating lower prices, I figure they have sold all their long positions and are now using leverage to profit from lower prices. Well if the majority of individuals have sold everything then in reality there should not be much left to be sold… So I feel this correction which started in April is almost finished.

NYSE Advance/Decline Line – 60 Minute Chart

This is one of my favorite charts to look at. While there are several indicators, market internals and technical analysis needed to clearly determine if the market is currently overbought or oversold, this chart is one that can help give you a good idea if you should be looking to buy, short or just stay in cash for the time being.

SP500 Futures Prices- 2 Hour Chart

The SP500 has been up and down like a yoyo with some very dramatic moves. Up 2+% day down 2+% the next… very sharp and powerful moves can be both every profitable or costly if not traded correctly. Last week we caught a nice 2% gain in less than 24 hours which was an exciting trade. It looked at though the market was about to breakout to the upside and possibly reach the 1150 level but early Friday morning there were rumors about some Euro bank having serious problems and that was just enough to cause a domino effect sending the market lower throughout the entire session closing on a very strong negative note for the day/week.

That being said the market internals are indicating that equities are oversold at these current prices and a bounce is due any time. With the panic selling on the NYSE Friday reaching 119 sell orders for every 1 buy order I think we will see some follow through next week with lower prices, then a rebound once investors finish selling everything they own at which point we will be looking to get involved again.

Weekly Trading Conclusion:

In short, money continues to flow into the safe havens (Gold & US Dollar). The major indices are showing extreme panic selling and look ready to in the next few days. There is a possibility that the market could break down and start another major leg lower which is a big concern to me. I will be glued to the market internals and support levels for the major commodities and equity sectors in hopes to catch the bottom or to avoid another melt down.

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