Bull trap
Today’s equity market rally is on very thin volume; indeed volume has been falling off since the last sell-off down to the 12500 area in the Dow Jones as investor uncertainty appears to be keeping real money away OR the real money is gone. A slew of hedge funds have suffered profound and sometimes business-ending losses since July so they are no longer players. The massive widening out of credit spreads have likely turned off some real money accounts as well. Add to this the pervasive uncertainty in the market, the drying up of private equity deals and some well deserved risk aversion and it becomes clear why volume has fallen off. The VIX has retraced much of the week’s gains but does not look particularly like a buy at the moment. However it will be a buy if it manages to hold the 20 handle next week amid a slew of economic data including; Construction Spending and ISM Manufacturing on Tuesday, MBA Mortgage Applications, Challenger Job Cut Report, ICSC Chain Store Sales, ADP Employment, Redbook, ISM Manufacturing, Pending Home Sales and Beige Book on Wednesday; Thursday’s data includes Jobless claims and Productivity, DOE Inventories, Chain Store Sales and Friday is NON-FARM PAYROLLS, Wholesale Trade and the DOE’s Natural Gas Inventories Report.
As for the VIX, if it holds 20, it’s likely to shoot higher due to the stronger emphasis the FED is putting on data going forward and the likelihood that some of the releases may well point to a weakening economy including NFP which may include some of the recent job losses. The S&P 10 day Historic Volatility just jumped back over 20% yesterday after falling sharply from 30 in Mid August. Vol traders are likely to be put or straddle/strangle buyers ahead of data next week.