Central Banks the Key for Movement from Stock Trading Range!
Major Call Activity on VIX Options!
by Ian Harvey
July 30, 2012
The market bulls proved victorious yet again last week, as encouraging developments in Europe overshadowed lackluster earnings from the tech sector. And now, investors' appetite for risk could increase even more this week, should global central-bank moves pan out in the bulls favor.
News from Europe to Upset Trading Range
"Within our mandate, the ECB is willing to do whatever it takes to preserve the euro and, believe me, it will be enough."
- European Central Bank (ECB) President Mario Draghi, July 26, 2012
- The Street, July 26, 2012
"Spanish and Italian bond markets rallied yesterday as investors cheered Draghi's signal that the ECB is prepared to intervene to reduce soaring yields. Now he has to deliver, or face deep disappointment on financial markets, analysts said. The risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann. The Bundesbank reiterated its opposition to bond purchases today."
- Bloomberg, July 27, 2012
“…..Going back to early June, the SPX has grinded higher in a very choppy fashion. …..staring at resistance from the 2011 calendar-year high just above current levels, while support at 1,333 -- double the March 2009 low and a 38.2% retracement of the June low and July high…..”
- Options Expiration Expectations , July 16, 2012
“….. Since April, there’s been a huge spike in short interest on all optionable stocks. In fact, the number of shares sold short recently climbed above the peak seen last September. What is extremely encouraging here for the market bulls is that short interest just ticked lower, suggesting the shorts could be covering. The last time short interest was this high and rolled over; there was a 30% rally in the SPX over the next six months. Whether this likely to happen again is anyone’s guess, but it's another sign that siding with the market bulls is probably a wise move.....In conclusion, the odds of higher prices are still very good right here."
- Indicators Offer Uplift to the Stock Market, July 23, 2012
TOP OPTIONS TRADES SINCE JUNE 01, 2012
|HLF July 47.50 Calls||53%||APPL Aug 650 Calls||67%|
|DLTR Aug 110 Calls||32%||UIS Oct 17 Calls||79%|
|HSY Aug 70 Calls||56%||TSO Nov 25 Calls||54%|
|NKE Oct 92.50 Calls||49%||HLF July 47.50 Calls (again)||38%|
|FB Aug 25.00 Puts||500%||DISH Sept 30.00 Calls||100%|
With support on the SPX holding in the 1,333 area last week, another encouraging sign for the market bulls was the CBOE Market Volatility Index (VIX - 16.70) failure to topple the area that is 50% above this year's intraday and closing lows of 13.66 and 14.26, respectively. This resistance area is between 20.44 and 21.39, and, as you can see on the chart below, the VIX failed to overtake this region before falling back below the ’round-number’ 20 strike late in the week.
The VIX and Options Activity
Turning to option activity on the VIX and major exchange-traded funds (ETFs) like the S&P 500 SPDRS (ARCA: SPY - 138.68), PowerShares QQQ ETF (Nasdaq: QQQ - 64.87) and Russell 2000 iShares Index (ARCA: IWM - 79.32), it is obvious that there is major call activity on VIX options, amid little put activity on the SPY, QQQ and IWM. It may be that this light put activity on equity-based ETFs is that hedge funds remain underweight, and the fact that this group is not in accumulation mode could be why the market has struggled in recent months. The good news for the market bulls is that equities have been relatively resilient, despite a lack of a major bid from the hedge-fund players.
Conclusion - Market Bulls to Endure!
In conclusion, hopefully market bulls will still endure, as expectations are low, which sets up a favorable risk/reward environment for the bulls. Short-term traders should be aware that the stock market is at the top of the recent range, and should have exposure to both a breakout and a failure at resistance. The sentiment backdrop suggests a breakout above the range could drive a sustainable rally, with the outcome of the ECB meeting in the week ahead a potential catalyst.
Further Articles Relating to the Week Ahead
1. The Week Ahead in the Stock Market - July 30, 2012
2. The Economy and Earnings in the Week Ahead – July 30, 2012
3. The Past Week Stock Market Results – July 30, 2012
4. The Major ETFs in the Week Ahead – July 30, 2012
5. Stock Returns after a Big Market Move – July 30, 2012