Last Crash Lows

By Jeff Pietsch | November 20, 2008 | 1:26 PM |  0 Comments

We managed to tag yesterday's referenced target break-down zone and [fact check edit: hit approached] last crash lows from '03 '02 on the SPX after this morning's gap down. The gap was filled on most indices save the S&P 500 (nearly) and Russell 2000 (not by a mile), which is a bit concerning from a breadth perspective. Cumulative tick was negative from the get go, but just right now we are seeing a healthy spike higher and it looks like S1 held. We'll see if this can lead to some modicum of momentum build. Gettelfinger is unbelievable -- God bless him.

click chart to enlarge

9:30AM PST: ...And what do you know, five minutes later we are green across the board on the auto news. Not so sure that's a good thing, but we'll go with it.

9:40AM PST: Did I just hear Deutsche Bank is calling for $40 oil (we've broken $50 today)? Holy Mother of all Crashes Batman. Should we all buy as a matter of personal consumption hedging this go? PS - Resistive volume spike occurring on the strength -- pause or reversal? Usually a reversal unless strong waves of short-covering come into the market. VIX is down to 75, off its opening highs over 80.

10:30AM PST: Struggling for support at the VWAP. I want to say it will hold, but internals stink, so careful here.

11:20AM PST: Back to S1 as Paulson speaks. Should I put back up the "What Hurts More?" poll? "A Paulson Speech" was one of the choices.

11:40AM PST: Third try higher any bar now? Hard call. Goes without saying though -- manage any trades either way very closely. Paulson -- wow -- If I really wanted traffic to this site I'd start writing about the new world order, or something like that. Still struggling to take back S1 -- nope. Will this be the fourth day of lower highs and lows?

12:10PM PST: With respect to the SPX, the problem with relying on the '02 lows, is that Systemic concerns, and Financials and Energy (major SPX components) weren't the focus then, and the velocity of this drop has significantly more energy than the last. Time will tell. Meanwhile, the VIX seems to be leveling off here intraday. Of course that could change any millisecond and the downtrend remains intact.

12:25PM PST: We may yet hit the October 2002 SPY lows of $76.72. Half an hour and another dollar to go. I assume CNBC is talking about either the Cash index or the Dow when they keep saying we've already hit the lows earlier today.

12:40PM PST: SPY is about to break S2 at $77.20. Relentless. Smack Down. What's the phrase -- "Where are we going and why are we in this handbasket?" Yikes. SPY $75.72 08 low?

12:58PM PST: CIT@$1.85. Overshoot, or Right Pricing? Man. Volume is very high. VIX over 81? Man. DELL beats on earnings, but revenues under. Thank goodness they don't give guidance... SPY RSI(2)=5.81.

Close: Zero interest rates on short-term bills. Stay tuned for a "mini crash ETF update" later tonight. For the record, here is how the day finished out. Let's hope it's truly and definitively historic.

Euro/JPY - One of My Favorite Recession Trades

By Kathy Lien | November 20, 2008 | 1:09 PM |  0 Comments

I have long said that EUR/JPY is one of my favorite recession trades. With the Eurozone in a recession and the need for the European Central Bank to step up to the plate and lower interest rates, the rate differential between the Euro and Japanese Yen will close and close rapidly. Furthermore, as US equities continue to tumble, EUR/JPY will follow suit.

But what I really like about this currency pair is that it is breaking out of a recent consolidation to the downside. As indicated by the chart below, the currency pair has entered the "Sell Zone" which I determine using Bollinger Bands. That level coincides with triangle support and the 23.6% Fibonacci retracement. As long as the currency pair does not rebound and take out today's high of 120.47, I think it's headed to 115 and maybe even lower.

Source: eSignal

Market Rallying (For Now), But VIX Still Rising

By Bill Luby | November 20, 2008 | 12:34 PM |  1 Comment

It is unusual to see the markets bounce off of a bottom and the VIX still continue to climb, but that is exactly what has happened over the past few minutes, with the VIX up to 80.35. This divergence usually resolves in a bearish fashion.

Interestingly, the VIX December 100 call that I referenced in the previous post has pulled back to a bid/ask of 0.75 - 1.00, with 774 contracts now traded.

The VXV and Extreme Structural Volatility Risk

By Bill Luby | November 20, 2008 | 12:00 PM |  0 Comments

In early October I set forth some of my ideas around how to think about volatility in A Conceptual Framework for Volatility Events. Today I want to briefly touch upon a topic that is tangential to that conceptual framework and closely linked to the VIX:VXV ratio that I talk about on a regular basis.

My thesis is simply this: the VIX looks out 30 days into the future and captures “event volatility” – or the volatility that is associated with events that are expected to occur in the next 30 days. These include Fed meetings, important economic data releases (employment report, consumer prices, retail sales, durable goods orders, GDP, etc.), earnings from bellwether stocks, even hurricanes, geopolitical crises and other events which can expect to cast a shadow over the course of the next 30 days.

The other half of the thesis is that the VXV (essentially a 93 day version of the VIX) always incorporates a full earnings cycle and a full economic data release cycle – so these events have very little impact on the VXV. As a result, the volatility that is relevant to the VXV is structural or systemic.

If this thesis is correct, it has some interesting implications for interpreting the VIX:VXV ratio and the VXV in isolation. For instance, yesterday’s new highs in the VXV, which occurred without the VIX even coming close to a new record, suggests that traders are currently pricing in record amounts of structural or systemic risk. In the long run, this "structural volatility" is a lot more dangerous than the event risk associated with the VIX.

click chart to enlarge