MARKET INSIGHT: Beware of Falling Bulls
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Joel Addison, Optionetics.com
September 25, 2002
September 25, 2002
Stocks got a nice bounce on Wednesday, following new multiyear lows being reached on Tuesday. However, before we get all giddy and look forward to massive gains in our long positions, let’s examine some evidence. The last thing we want to do is jump on the bandwagon, only to have the wheels fall off as soon as we are long.
First, let’s examine today’s move. It did occur on slightly higher volume, but Tuesday’s decline was anything but panic driven. In fact, both the CBOE Market Volatility Index ($VIX) and the Nasdaq Volatility Index ($VXN) hardly moved on Tuesday, showing little fear from traders. Yet, Wednesday’s move higher actually sent both the VIX and VXN much lower. This is a sign that bearishness is still not dominating trader psyche.
Another fact to consider is the history of the stock market. Very rarely does a market passively hit prior lows and move sharply higher for an extended period of time. During 2002, we have had several occasions were traders thought a possible bottom may have developed. However, these occurrences were on panic selling and strong volume and were followed by strong recoveries. Even so, these short-term bottoms didn’t hold over the long-term. Fundamentally, nothing has changed and there still are many weaknesses to overcome before the bulls can gain control of the market again.
Earnings warning season is upon us and this is always a rough time for the market, even when we aren’t in tough economic times. Already this quarter, warnings are running ahead of the prior quarters, showing that things aren’t improving as we all expected they would earlier in the year. On top of these concerns, economic reports continue to show that the economy is stagnant if not falling back into a recession. This fact does little to spur capital spending, which leads to lower profits across the board. The final wildcard is the problems we have with the Middle East. A war could start at any time and this is hardly a bullish event. Maybe the combination of these things will create a massive sell-off that will quickly be recovered, but only time will tell.
Nothing is for sure when it comes to the market, but as option traders, we need to read the signs and trade accordingly. Sure, the market could head sharply higher, providing possible profits for long strategies, but the odds just don’t favor this side of the market at the current time.
Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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