For the bulls, buyers once again stepped in when the market looked on edge after losing 3.5% on Tuesday and Wednesday. After the November Jobs Report beat expectations on Friday morning, the S&P 500 spiked higher, and had regained 2.05% by the close. Also helping fuel the gains, ECB President Mario Draghi, just one day after underwhelming investors with his stimulus plan, stressed that the ECB could boost the size of bond purchases if necessary. In addition, Factory Orders and Construction Orders beat expectations this week.
For the bears—and many bulls, there was extreme fear on Thursday after two days of 1% or greater losses. Again, the selling pressure spread across all sectors and the major indexes were testing significant levels. Then on Friday, as has been the case so many times in 2015, the bulls bought the dip. However, the likelihood of the Fed raising interest rates at the December meeting is now nearing 80% after the Jobs Report, and the downward spiral of commodities continues, putting extreme pressure on many steel/oil/copper companies.
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 14.81, having traded above 19 on Thursday. This approximately 15 level seems to be the new lower end of the range of the past several months.
Several times this year as the market approached the high end of its 2015 range, put buyers have swept in, betting against a breakout for the market or protecting against a fall. The failed breakouts and aggressive selling pressure that has met the higher end of the S&P 500 range has kept a floor under the VIX around 15. However, if the market has a “Santa Claus Rally” into year-end, I expect the VIX to fall back to the 12-13 range as we get closer to Christmas and New Year’s.
Events for the Week to Come
While last week was packed with important economic data and events such as the ECB and OPEC meetings, this week will be an extremely quiet. That said, the events and price movements of last week will almost certainly continue to reverberate through the market for a while. The currency, bond and oil markets had huge moves last week, which likely helped create the extreme volatility in equity markets. I expect this type of currency/bond/oil movement to continue to send shockwaves through the market for at least another couple of weeks as traders reevaluate the ramifications of this past week’s volatility across virtually all asset classes.
What Traders are Saying
All successful traders have their own rules on stops. Some traders believe in “hard stops,” some believe in “loose mental stops” and others believe in a combination of the two. I fall in the camp of the combination of the two. If my position is below my stop into the market close, 95% of the time I sell and don’t ask questions. However there are conditions in which I give a position a bit more time.
It’s very similar to life. My kids aren’t allowed to leave their rooms till 7 am. However, if they’re sick or had a nightmare, they can come in our room. That’s common sense and using discretion.
Somewhat similarly, I use discretion when evaluating stops. OXY blew through our stop on the open on Friday as oil and oil stocks fell apart. Then, slowly but surely, call buying accelerated in oil stocks and the sector began to rally. Also, the big OXY trader closed 10,000 of his December calls for a loss and bought 10,000 January Calls to give himself more time to be right. Because of these potential rally signs, I didn’t immediately send a sell alert on our OXY position.
OXY had traded as low as 69.64, but began to rally, and by the close had regained over two dollars and closed at 71.72. With the sector and OXY rallying and the call buying across the sector, I decided to give the position another day.
Clearly breaking my mental stop could be a mistake if OXY tanks again today. That said, I firmly believe in not trading like a machine. If the market hints at a potential bounce—as it did on Friday morning—I will use my discretion. However, if put buying picks up or the stock looks weak today, I will not hesitate to sell half of the position at a loss.
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