VOLATILITY ALERT: Fear Rises as Major Market Indices Take Hit
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July 29, 2007
Overall Market Volatility: Traders have decided that mostly positive earnings aren’t enough to keep them from selling. Concerns about the credit market and the economy have led to selling that was heavy this past week. The Dow ($INDU) gave up 585.61 points, or 4.23 percent, to close at 13,265.47. The S&P 500 ($SPX) declined 60.93 points, or 3.97 percent, to 1,473.17. The Nasdaq ($COMPQ) lost 125.36 points, or 4.66 percent, to 2,562.24.
The fear indices rose sharply during the week, easily taking out resistance levels. The CBOE Market Volatility Index ($VIX) added 26.19 percent to 21.39. The Nasdaq Volatility Index ($VXN) tacked on 32.53 percent to 23.18. The VIX hit a high Friday not seen since June 2006. These indices rise when traders buy more puts than calls on the S&P 500 and Nasdaq 100 ($NDX), which is a sign of fear. We could have seen the worst of the selling already, with a majority of the bears getting out. However, if the credit market continues to deteriorate, more declines could ensue.
Earnings should be the focus right now, but problems with the subprime market seem to have leaked into other credit markets. Of course, the housing sector continues to see weakness as well. Hopefully, positive earnings news this week and even a small amount of good news in the credit markets could result in some buying after such large declines.
HIGH VOLATILITY RANKING 7-27-07 | |
SYMBOL | COMPANY |
S&P Deposit Receipts | |
iShares Tr. Russell 2000 | |
SPDR Financial Sector | |
Sprint Nextel Corp | |
SPDR Energy Sector | |
Exxon Mobil | |
Bank of America Corp | |
Alcoa Inc | |
Wells Fargo | |
Johnson & Johnson | |
High Volatility: SPY shares have fallen sharply the past few weeks to a price of 145.11 from 156. However, this decline has taken SPY to support at its 200-day moving average. After such a large decline this past week for the major market indices, we could easily see a bounce, especially with support at this key moving average. The problem is that IV is high now on SPY options, so buying a straight call is more risky. Traders could use a bull put spread to benefit from a bounce and fall in IV. If SPY shares breakdown below this key moving average, they could easily fall another five points to 140.
LOW VOLATILITY RANKING 7-27-07 | |
SYMBOL | COMPANY |
Kyphon Inc | |
Chaparral Steel | |
Bausch & Lomb | |
Varian Semiconductor | |
aQuantive Inc | |
Altria Group Inc | |
Illumina Inc | |
Vertex Pharmaceuticals | |
Microsemi Corp | |
Novartis AG | |
|Low Volatility: NVS shares have fallen in 2007 to a new low at $53.18. However, the stock is now near support between $52 and $53. Considering the past two weeks were so negative, any bounce could result in solid gains for NVS. With IV low on NVS shares, a call could see nice gains in a short amount of time. Of course, a quick one to two week trade is more risky, but the profits can be substantial in a short amount of time. NVS is also in the drug sector, which is seeing a lot of merger activity and this adds some bullishness to the trade.
Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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