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A Matter of Volatility


I needn't tell you that panics bring opportunities...


"If you're hung up on nostalgia, pretend today is yesterday and just go out and have one hell of a time." -- Art Buchwald

I agree with Mr. Buchwald's thoughts and definitely try to have one hell of a time each and every day. When you trade as actively as my brother Pete and I do, there's a fair amount of excitement even on the dullest day. Unfortunately, though, not all of that stimulation can be logged to the "pleasure" side of the ledger. Some days, despite our best efforts, things just have to be chalked up into the "pain" column!

As the market dances around the 10,800 level for the Dow, I sought some help from my friends at to see whether (without the rose-colored glasses) the market is poised to go over to the bulls or the bears when the Dow breaks back through 11,000. Here's what I found:

There are 10 prior occurrences of the Dow breaking through that very respectable number, omitting any repeat occurrences within 40 trading days. The Dow seemed to exhibit further bearish tendencies after such an event in the past, dropping in eight of the 10 cases by an average of a negative 3% during the next 15 trading days. The two rallies gained just 1.6%. The overall edge is a negative 2.1%.

Armed with this information, let me put it into perspective, as the Dow is now trading around 10,900 -- just shy of that coveted 11,000 level. Using 10,930 as an example, 80% of the time we averaged a drop of 3%, which would bring us down to 10,602, a drop of 328 points. This would put us right at the lows it traded at this year, during the week of Jan. 23-27. And I don't mean in rough terms, I mean EXACTLY.

As's work shows, the rallies, which took place in two out of 10 occurrences, were half as large as the declines, coming in at an average of 1.6%. A rally of 1.6% from 10,930 would bring us up to 11,104, up 174 points.

Now let's take just a quick look at the market's perception of risk, which traders refer to as volatility. After a very volatile week last week, our recent work on a Volatility Acceleration Matrix™ (VAM™) continues to show a build, rather than a contraction, of volatility.

We will soon have the VAM running in real-time, but until then let me tell you that the Chicago Board Options Exchange's Nasdaq Volatility Index (VXN), which measures implied volatility for the Nasdaq-100, hit a low of 18.10 June 2. However, the VXN has since shot all the way up to a fresh 52-week high of 27.29, an unbelievable surge of 50% in the past few sessions, and shows near-panic is gripping traders of tech stocks!

After this incredible surge of volatility the Nasdaq should find a tradable bounce, and this morning's upgrade (June 14th) of semiconductor stocks could be one of the catalysts that can help bring that about. I needn't tell you that panics bring opportunities, and such will be the case again here, but given what we've learned from, I'd say we can be a little slow to pull the trigger on buying stocks and Exchange-Traded Funds.
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No positions in stocks mentioned.
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