by Andrew Houghton and Nick Atkeson 05/06/08
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.
The S&P 500 (SPX) was down 6.41 points yesterday, or 0.45% -- a relatively minor move in contrast to the moves of 3% and 4% experienced in the first quarter of this year.
Additionally, although the market spent some time below the much-discussed low from Nov. 26, 2007, of 1,406.10 (and one that proved so difficult to break above), yesterday's close of 1,407.49 was above that mark.
From the close on April 30 through May 2, the SPX moved up 28.31 points, or 2.04% -- putting yesterday's 6.41-point retracement of that two-day move at less than 25%.
From these numbers, the situation still looks fairly constructive as markets tend to bob and weave on their way higher or lower.
EVEN VOLATILITY IS VOLATILE
The Chicago Board Options Exchange's Volatility Index (VIX), too, retraced some of its recent moves yesterday -- rising 0.71% after a 1.72% drop between the Wednesday and Friday closes. (The SPX and VIX are normally inversely related.)
While the retracement here was 41% of the move, versus the 22% giveback in the SPX, it was still less than half and did nothing to rearrange the chart of the VIX, which appears to be in descent.
U.S. DOLLAR DROPS, OIL POPS
The U.S. dollar/commodity trade that seemed to have reversed with the dollar rally during the first two days of May sustained a little more damage yesterday as the dollar, as represented by DXY -- an index based on the exchange rates of six major world currencies -- opened near its highs for the day and closed toward the bottom of its range.
The real story comes when we talk about the next part of the dollar/commodity trade, as crude oil futures completely reversed the move lower that they made last week and the June contract closed at a new record high yesterday of $120.03 per barrel.
The move in oil and resulting moves in the credit default swap and equity markets on those oil names created a bit of a head fake during the past few trading days. Shorts that were established late last week in the exploration, production and production-service names were, for the most part, covered yesterday. Additionally, some of the long positions that had been sold last week were reinstated.
WHAT WILL TODAY'S MARKET BRING?
That the dollar held up as well as it did yesterday given the move in crude was surprising when, for quite a while now, these two have been inextricably linked. This could be the result of nothing more than a time delay, though, so it will be important to see what how the dollar acts today.
There are a lot of factors that contribute to the price of a barrel of oil, and far fewer of these are under America's control. Additionally, with the Fed Funds rate already at 2%, there will be little more that monetary policy can do to fight $4-a-gallon gasoline.
In the end, it will be interesting to see which force becomes harder to overcome: the cleaning up of domestic real estate avarice or the drag on the economy caused by record energy prices. Suffice to say, we are probably not even close to the seventh-inning stretch.
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!
