Big Rally, Dow reaches 9,000 as VIX retreats

Reacting to one of the worst weeks on Wall St, the Dow rebounded over 900 points to close at 9,387 on Monday. Coming off record highs over 75, the VIX finally came back down to earth closing just under 55 down 21%. The big rally's impetus early Monday morning as markets worldwide reacted positively to European government's interventions into the banking system, pouring billions worth of capitol into world banks. Echoing this tactic, Treasure Secretary Paulson is rumored to do something similar tomorrow. Dow futures are already reacting positively to the news up 192 points in early trading. The question remains however, with the economy still in turmoil, how long will this rally last?

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Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...

Morning Update

ECB officials said last night that ECB President Mario Draghi will likely wait to hear Germany’s Constitutional Court’s ruling on the EFSM before publicly unveiling his plans. Many were hoping Draghi would unveil his plan after the ECB’s September 6th meeting, but this is becoming increasingly unlikely. Today Reuters is reporting that Germany is the latest European nation to begin studying the possible impact of a Greek exit from the Euro. This comes ahead of Chancellor Merkel’s meeting with Greece’s Prime Minister today. Merkel has repeatedly said that she would like Greece to remain in the common currency, though clearly someone in Germany believes a Greek exit is possible outcome worth preparing for. This morning US new durable goods orders numbers we released for July, coming in at a gain of 4.2% M/M. Though this was strong than expected, it was primarily driven by strong aircraft sales. Non-defense orders excluding aircraft were down a sharp 3.4% M/M versus a 0.2% decline expecte...

Morning Update

This morning stocks, gold, and crude oil are all higher with VIX futures lower. This risk appetite is being driven by a report in the Financial Times that EU authorities are in “fresh talks” with the Spanish government to iron out details of a bailout before it is formally requested. This has helped the Euro regain the 1.3 level after selling off hard yesterday. Prior to Oracle’s earnings report yesterday after the close, one trader bought 20,307 Oct. 32 puts for $0.79 and sold the same number of the Jan. 34 calls for $0.98. This spread, known as a collar, was put on for a net credit of $0.19 and was likely used to protect the downside risk of holding a long stock position through the earnings announcement. Spreads like these are useful when you are long stock and bullish over the long term but believe the stock could dip in the near-term. By buying the Oct. 32 puts the trade is able to eliminate risk below that level. However, by financing the puts by selling the Jan. 34 call the tra...

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