Good morning traders,
World equity markets are generally up this morning. Biggest upside movers are Japan (1.5%) and Norway (1.1%). China, Ireland and Portugal are down slightly overnight.
No big currency moves overnight, though the Yen is strong (EURJPY AUDJPY etc) against most of its trading partners. One of the big questions this morning will be whether we have second day followthrough from yesterday’s US Dollar strength.
In energies, Crude Oil is managing to hold on to recent gains and is consolidating around 90.00 (basis Feb futures). Keep an eye on Oil for continued strength this quarter, though, in the short term, we are coming in this morning with another slight Brent/WTI divergence which is usually not constructive for Crude pricing on the same day.
And of course, everyone’s focus is on precious metals which have, so far, been unable to put together renewed upside momentum. Though the recent US Dollar strength has certainly weighed heavily on the complex, there is very likely more going on here. Short-term traders should keep an eye on Gold and Silver intraday, as a sharp break will undoubtedly have an impact on metals and mining stocks. Many of the miners may be a little oversold–ABX perhaps less so than some of the others.
For today’s market action, 1270 is an important level to watch based on overnight price action in the ES futures. Below that, probably targets that 1256 area we were using yesterday, but perhaps not in a one day “straight shot” scenario. Ignore the noise, ignore the naysayers, and simply follow the market action, which points higher until something changes. Financials should be on your radar also (GS, AIG, etc), both for possible daytrades and swing trades. If the market continues to press higher, there is probably a lot of upside in some of these names for swing traders. It has been difficult to focus on Materials stocks recently for daytrades (with the exception of the Rare Earths), but it makes sense to have a plan for Metals and Mining stocks if Gold and Silver should be extremely weak today. Lastly, I will continue to focus a little more time on Energy stocks intraday, as there have been some good opportunities there recently.
On a more theoretical note and a slightly longer timeframe, this may be interesting to some of our readers. I am hearing dire warnings because of depressed Equity volatility (and there are some “studies” circulating that have numbers I can’t replicate for 20 day historical volatility… I think they are just wrong). Here is what we had to say on the subject in my morning note for Waverly Advisors:
Much has been written and said in recent days about the historically low volatility levels in the Equities markets. Though we are seeing a seasonal return to normal trading volume and activity, it is worth taking a few minutes to consider a few issues related to this low volatility. First of all, there are several articles circulating that claim that some of the major indexes have never been at historical volatility levels this low, and that, for instance, the DJIA has only been this low on a single trading day in the past 100 years. This is simply not correct. Historical volatility is very low (say bottom 3% of the historical record), but we find it difficult to attach any far-reaching significance to this fact.
Furthermore, implied volatility levels have maintained a healthy premium over realized. This creates a problematic situation for options buyers—the implied volatility premium means that options are relatively expensive, but, historically, there are significant periods where realized volatility stays at very low levels for a very long time. Even though options may appear to be cheap on an absolute basis when compared to recent history, muted realized volatility over the next several months could actually prove them to be overpriced. Conversely, selling a lot of premium is a very difficult trade with realized volatility so compressed. In the end, we see the only appropriate use of options is in specific, targeted tactical applications at this time.
