Options Market Update March 14, 2016

 
After the European Central Bank "fired its bazooka" of economic stimulus, European and U.S. markets swung wildly on Thursday, but managed to close at the highs for the week on Friday. For the week, the S&P 500 gained 1.11%, the Dow added 1.21%, and the Nasdaq advanced by 0.67%.

For the bulls, the S&P 500 has now gained 1% for the fourth straight week , its longest such streak since 2013. Similarly, oil has now advanced for four straight weeks, and both the S&P 500, and oil, are nearing unchanged on the year, after a dramatic fall for both to start the year. Potentially aiding these advances was the ECB announcing purchases of 80 billion euros a month, and lowering the deposit rate to minus 0.40 percent ... both of which are unprecedented actions.

For the bears, Thursday looked like a potentially big day as the post ECB gains of 1% were wiped out, and the S&P 500 reversed to be down 1% at one point. However, the bulls again stepped in and bought the dip, and by the close of trade on Thursday, the market was virtually unchanged. Then, even worse for the bears, on Friday, the market ripped higher by 1.5%. These bears would point out that these sharp rallies have been led by the most heavily shorted stocks, and much of this rally has been on light volume. Also, the bears continue to highlight that central bank stimulus actions, much like those of the ECB this past week, are becoming less and less effective.

Volatility

The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 16.50, or virtually unchanged on the week. I would expect this to be a "sticky level" headed into a week full of central bank announcements, including the Federal Reserve on Wednesday. If the market can remain stable, or advance, following the Fed's announcement, we could potentially see even lower levels for the VIX.

Events for the Week to Come

While the market is pricing in virtually no chance of a rate hike this week, traders will be focused on what the Fed has to say about the future path of rate hikes. After relatively strong economic data recently, the bond market is now pricing in a 50/50 chance that the fed will raise rates at its June meeting. However, those odds may change dramatically following Fed President Janet Yellen's press conference on Wednesday afternoon.

Also this week, the market will be watching the primaries in Florida, Illinois, Missouri, North Carolina and Ohio. In addition, the Bank of Japan and the Bank of England, will announce their interest rate policies this week.

What Traders are Saying

There have been plenty of traders who have called this "the most hated rally ever!" And the pain has been felt largely by hedge fund titans who in years past have made a fortune during market turmoil. For example Larry Robbin's Glenview Capital Management is down 15% to start 2016. Similarly, hedge fund legends Bill Ackman and Ken Griffin are down significantly so far this year.

So why is this "the most hated rally ever!"?  The stocks that hedge funds have been betting on such as Valeant (VRX), Apple (AAPL), Amazon (AMZN) and others are chopping around, while the most shorted sectors such as commodities, oils and financials are ripping higher. Essentially, these traders' bullish positions are going nowhere, or down, and their bearish positions are going straight up.

This recent action of the most hated stocks going up, and the most loved going down, led Morgan Stanley's Head of U.S. Equity Strategy, Adam Parker, to admit he has been doing a poor job, and that his clients should have taken the other side of his trades this year. Furthermore his advice to clients was, "When you think of something, do the opposite."

Will the "dash for trash" continue to lead in 2016, at the expense of the best in breed stocks? I would tend to believe that stocks such as Chesapeake Energy (CHK), which may have major long-term issues, is ripe to fall, having gained 163% in the last month. That said, I am not going to step in front of a potential "rip your face off rally" if the hedge funds are forced to cover their losing bearish bets.


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