9:00am (EST)
“How do you like them Apples?”
This was the question the bulls left the bears with on Friday’s close as they rallied the market near its February highs. More importantly, the rally that stalled for 4-weeks is now back on as the bulls try to end March on a strong note. Although we are sure we haven’t heard the last growl from the bears, it appears our thesis that this rally would last from October 2010 to April is right on.
Of course, we didn’t expect all of the world drama that is currently grabbing the headlines but events around the globe are happening quickly which has caused a lot of the current volatility.
Things are still in a flux but the turmoil in Libya has suddenly gotten better which should mean lower oil prices. Portugal is a mess, Japan is still worrisome, sovereign debt is still an issue and higher food prices are here to stay. These headlines will continue to affect the market but it appears that the U.S. markets may actually be the best place to put your money.
The bears had the bulls in a corner the day before St. Patty’s but it has been all green since. The Dow traded to an intraday low of 11,548 on March 16 which was just above our 11,500 downside target and finished at 12,220 on Friday, up 50 points. For the week the index added 362 points, or 3.1%. The next stop the bulls are pushing is 12,500 with an outside shot at 13,000. Support is at 12,000 and 11,800.
The S&P 500 finally cleared 1,300 last Thursday which brought some buyers back into the market and ended Friday up 4 points to settle at 1,313. The index had reached a low of 1,249 on March 16 and we nailed support at 1,250. For the week, the S&P added 38 points, or 2.7%. The break back above 1,300 should carry to 1,325 with a run to 1,350 if the bulls can push through 1,334 which represents the double off the 2009 lows. The bears will target 1,300 then 1,275 again.
The Nasdaq is the real head-scratcher though. Just when it looked like Tech was going down with 3 fingers up, the bulls threw the sector a life jacket after watching it fall to a low of 2,603 by mid-March. The break above 2,700 breathed new life into the Nasdaq as it ended Friday at 2,742, up 6 ticks. For the week, Tech surged 100 points, or 3.8%. Nice. There is resistance at 2,800-2,850 but if broken there is a chance the bulls could push 3K.
We said last week that the 4-week “trading range” the market has been in since mid-February was getting stretched and becoming more volatile. After testing the bottom of that range, a week later we find ourselves back near the top of the range. These type of “V” patterns are very rare.
As a result, the CBOE Market Volatility Index (^VIX, 17.91, down 0.09) has been on a 7-session slide after touching 31.28 on…March 16. The 45% decline since has been the steepest on record which shows just how extreme the volatility has been. Remember, a VIX reading under 20 indicates confidence and calm while a reading above 30 indicates nervousness and panic. At the beginning of the month, the VIX was at 21 and the run to 31 was a 50% jump in two weeks.
The iPath S&P 500 VIX ($30.37, down $0.04) was at $35 last week and we said the option pits are quite active. The April 30 puts (VXX110416P00030000, $1.52, up $0.07) traded 13,000 contracts on Friday and easily doubled for the week.
If the bulls push the market higher then we should see the CBOE VIX fall to 14-13 which is when we would become cautious again. We said in November this rally had legs until April so we still should see one more run by the bulls. There is an old adage on Wall Street that says “sell in May and go away” so this thesis could also be playing out as well. Either way, we expect the volatility to continue into April.
We have a few trades that are thisclose to becoming official recommendations. Our Watch List has been full and we missed a few good trades last week. In our previous Weekly Wrap, we talked about Imax (IMAX, $31.71, up $1.72) and how it was at the bottom of its trading range. Shares were at $26 last Monday and we were hoping for a dip to $25.50 but it never came. Last Thursday, shares jumped 10% and on Friday they added another 6%. The calls options we were following zoomed 200%.
We are hoping some of our new trades can deliver the same kind of punch and many of them will be momentum plays. We are also profiling some WEEKLY options this morning which also may become official recommendations. These options expire this Friday, April 1.
Futures are up slightly as we head to press. Be on the lookout for a possible TRADE ALERT this morning.
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