Volatility!

by Larry Levin


Today was another wonderfully volatile day. The Dow experienced another 200+ point range, while the S&P futures logged in a 28-point array of trading opportunities. Some estimates calculate the percentage of trading days where stocks (measured by the Dow) gained or lost at least 1%, at 20% of the time since 1980. Recently, however, a 1% trading range is occurring about 62% of the time. Volatility, indeed!

The culprit for such wide ranges is more bad economic data; inflation, housing, oil, and the FOMC minutes to mention a few. The ranges mentioned above were not the result of a large equity sell-off on the news, but rather a rally. Although I still think stocks are quite bearish, today's rally in spite of more bad news could be a signal that the markets have run out of sellers. Could the next S&P move be back to 1,400.00 and the Dow to 12,770? Based on today's action alone, the answer would be yes.

The CPI data was released before the open showing (yet again) increasing inflation. The government says inflation is now running at an annual rate of 4.8%. And since this data was compiled last month, it means that price increases continued to escalate while the economy dramatically slowed. Moreover, during this slowdown, companies have been quite willing to risk losing market share by raising prices.

"Stocks took it on the chin this morning after the CPI for the month of January came in higher than expected," said Robert Pavlik, chief investment officer at Oaktree Asset Management. "The market initially stammered about but refused to collapse and just around noon the market began to shake off the earlier losses." It was at that time that buying programs kicked in and erased the early losses.

Another report showed that applications for building permits, considered a good sign of where construction is headed, fell by 3% to an annual rate of 1.048 million units. This is the lowest level since November 1991. Luckily, buying programs can't read so the rally was able to proceed. "Clearly the housing recession continues with no end in sight," said Bernard Baumohl, managing director of the Economic Outlook Group, a private forecasting firm.

Energy prices are still going up, eh? Gasoline prices at the pump popped 2-cents overnight. Oil traded north of $101-barrel today for the first time in history. Closing above $100-barrel was a big deal yesterday, but $101 today? Not so much. Luckily, buying programs can't read so the rally was able to proceed. The energy complex is trending higher - 'nuff said.

Later, the FOMC minutes were released. In it, the Federal Reserve lowered its projection for economic growth in '08 even though it has already dramatically slashed interest rates, citing damage from the double blows of a housing slump and credit crunch. It said it also expects higher unemployment and inflation. "With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the committee agreed that downside risks to growth would remain even after this action (most recent cut)."

There were no signs of buying programs in the afternoon, so I'll assume traders were able to read this and bought despite it. The logic must go something like this, "According to the Fed, the economy is still so bad, it must be a good time to buy. After all, if it's this bad, they'll just keep cutting rates." How'd that work in Japan circa 1990? Oh, I digress.

Real Time Trading Signals*for

Trade Date: 2/20/07

E-Mini S&P Trades*
(before fees and commissions):


1) B/Away sell @ 8:35am at 1338.00 = -2.00 & -2.00

2) FT sell @ 9:45am at 1345.00 = +4.50 (1 lot)

3) TP buy @ 10:55am at 1341.75 = +.75 & +6.75

4) ENGF buy @ 12:05pm at 1352.50 = +2.50 (1 lot)

5) Pivot sell @ 12:10pm at 1356.50 = +.75 & -1.75

6) V-A buy @ 1:00pm at 1352.75 = +5.75 & -2.00

7) IDVA buy @ 1:15pm at 1351.75 = +1.00 & b/e

8) FT buy @ 2:15pm at 1358.50 = +1.50 (1 lot)

9) FT buy @ 2:25pm at 1358.25 = +.75 & -1.75

10) OTF buy @ 2:45pm at 1357.25 = -1.75 & -1.50...+11.50 points

E-Mini Russell Trades*
(before fees and commissions):


1) Sell @ 9:17am at 697.3 = -1.3 & -1.3

2) Buy @ 9:32am at 697.6 = b/e (1 lot)

3) Buy @ 10:33am at 700.4 = -1.0 & -1.0

4) Buy @ 11:26am at 706.6 = -.8 & -.8

5) Sell @ 12:40pm at 706.1 = -1.1 & -1.1...-$840.00


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