by Houghton and Atkeson 05/13/08
Editor's note: While Sam Collins is on vacation through May 15, OptionsZone.com contributors and professional traders Andrew Houghton and Nick Atkeson are taking over the Daily Market Outlook as guest columnists.
Art Cashen, through his brief appearances on CNBC most mornings and afternoons, brings a gravitas to his observations that only the healthy skepticism of 40-plus years on Wall Street can imbue.
Art was recently quoted as saying, "Volume equals validity." If that is the case -- and if Art says it, we would tend to agree -- then the market's action on Friday and Monday was a non-event.
For anyone who stretched their weekend by a day on either side, the S&P 500 (SPX) would appear to have taken two days to move up 5.9 points. This kind of trading action is quite mundane, given the dramatic gyrations we've gotten used to.
Trading volume was less than 1.1 billion shares on the two days in question, and the index sat 32% below its 200-day moving average when the bell rang last night.
AIG, FINANCIALS WEIGHING ON THE MARKET
American International Group's (AIG) Friday announcement of a net loss of $7.81 billion pushed the stock down 7.5% and the S&P down 9.4 points. This move was exacerbated by crude oil's climb to $125.96 per barrel and the U.S. dollar's move lower.
As write-downs and capital-raising as a result of subprime exposure has now become commonplace, AIG's woes seemed to be quarantined to its stock price. And yesterday, the market instead chose to focus on crude oil futures moving lower by $1.73 per barrel and then dropping an additional 31 cents in after-market trading.
Meanwhile, the dollar weakened by 91 ticks (as measured by the DXY contract) but this did not seem to worry anyone yesterday.
The financials in general seemed to distance themselves from AIG's problems, as they continued to move up from the intraday low set Friday of $25.77 on the Amex Financial Select SPDR ETF (XLF). Although giving this move the advantage of perspective, it went from nowhere to nowhere as this ETF and its components are middling about in the same range they have been since February.
So, we have thrown out a bunch of facts and figures, but where do they point? The question might actually be the answer. In two days of very low-volume trading, we've covered 24.7 points of S&P territory but made only 5.9 S&P points of progress. As they say, it is like eating soup with a fork -- lots of action but not much nutrition.
WILL NEWS VOLUME BRING TRADING VOLUME?
Retail sales, various measures of consumer confidence, mortgage applications, Consumer Price Index figures, jobless claims, industrial production, capacity utilization, housing starts and building permits are all due to be announced between now and Friday.And if all of this weren't enough, Fed Chairman Ben Bernanke is scheduled to speak twice this week. Maybe the economic news this week will give us some clarity and will bring back the volume that equals validity.
The sense that the market is making its way through the subprime exposure issues is a correct one. On any given day, the timing and market action can be extremely tricky and not something that can be predicted with any accuracy other than luck.
During market conditions like these, there are two ways to trade. One is keeping very tight risk controls on positions and trying to extract whatever profits present themselves before they disappear. The other method of operating in the current market environment is to increase your investment horizon, put on smaller positions and loosen the risk-management parameters a bit. Smaller positions will translate into smaller, intermediate losses and not create the anxiety associated if all one's eggs are in one basket.
Andrew Houghton and Nick Atkeson work together to identify unusual options trading activity on the "big money" (i.e., institutional) level and regularly contribute their findings to OptionsZone.com.
For a timely look at big-money options trades taking place under the radar and independent of the headlines, visit Andrew and Nick's full archive of Unusual Options Trading Activity by clicking here now!
