Tuesday, April 7, 2009

Ignore The VIX For Now

What happened to the VIX today? Fear. Yep, fear prevented the fear index from rising in a market that slid. Not fear of the economy. Not fear of a market rally.

The VIX dropped today due to fear of the uptick reinstatement ruling. The VIX will be the most affected by this ruling since it will reduce market volatility to some degree. I don't think the uptick rule will have a huge affect on stock movement or market movement. But what it could do is slow down how quickly the market or a stock can move up or down. Thus, market volatility itself falls due to less money being put in out-of-the-money options.

So, do not play the market according to the VIX until the dust settles with the uptick rule. Throw away the charts. These next few days will be meaningless other than perhaps lowering the VIX range in the upcoming weeks and months.

I think the ruling will be to not reinstate the uptick rule, but instead, have a decision to require shorts to settle up in a shorter time than they do today. That will prevent shorts from being so aggressive in market declines. It won't prevent the market from going down, but it may slow down how quickly it can go down.

As I mentioned yesterday, the market should see 820 (it did) and if you have to play long, Health Care is probably the place to be (which it was). Health Care was somewhat under performing lately so it was just a cyclical trade. I also said GLD may be a good short term play (which it was) but I don't play gold for the short term.

The market should continue its downturn going into the uptick ruling. I think we see 805 tomorrow and then a real struggle. Probably a bounce from there but not a big one. So not a big move in the market tomorrow but I don't see it going up unless some huge news driven event happens.

I obviously still like SRS. I own it in my charitable trust (ah, just checking to see if you are still paying attention). Commercial RE is still a mess and will continue to be a mess no matter how many secondary offerings the REITs offer which will just make their stock go down faster than if they had not created a secondary offering.

AAI April 5 puts are a steal. Hardly any premium and on a volatile stock that just went up almost 100%. Even if we miss this, the odds are in our favor. But we won't miss. Shorting transports may be a good play in general right now after its recent run up on the belief the hard times are over.

I am thinking of a GOOG straddle going into earnings but they report after OPEX so it has to be May and the premiums are just too high.

After today, I also think treasuries may have some difficulty. So TBT is a solid play for a long term hold.


  1. Great read ..agree with your points.....

  2. i agree as well

    the 50ma is my target, and when ill pull off my shorts, which is about 795, regardless which way we go (even if its UP more) that is going to be re-tested here....first, goog spot to profit take on shorts, b/c technically the spx should get at least a mini bounce there as support

  3. Erik, please don't pull off your shorts. :)

  4. Brian,

    How long do you think we should "ignore the VIX until the dust settles with the uptick rule"?


  5. Man you are good. I just need to follow your suggestions now :-)
    BTW - I have some SKF in my bag at an average cost of $125...what do you think? Should i take a loss and move on or wait for the tide to turn?

  6. SRS Player, its hard to say. But tomorrow will be a bit strange and we really are probably going to have to recalibrate the VIX according to the new rules. Nothing may change, who knows but don't get freaked out if VIX falls abnormally compared to the market.

  7. Hitesh, well I don't feel safe trading financials on the short or long side right now. So many things can make or break them. Well, there are two banks I feel comfortable shorting. BAC and WFC. But overall, I don't want to be in a financial ETF.

    So, you have to decide for yourself on that one. Lets put it this way, if I had to pick a side, I would play the short side of financials. You may want to consider selling some covered calls on your SKF. less than 2 weeks until OPEX and you can reduce your paper loss. But, if you can stomach more paper losses and feel confident financials are going down, that is your decision.

  8. Brian,

    Thanks for the heads-up not to freak out if VIX drops abnormally.