Learn the trade here. Make it on tradeMONSTER

Options Trading News

January 3, 2013  Thu 8:29 AM CT


It's hard to be bearish after Congress avoided the "fiscal cliff." Plenty of noise and posturing will remain--the debt ceiling in March and higher taxes in the near term--but in my view these are not important enough to derail the rally now taking shape.

While all the attention focused on Washington in recent weeks, positive trends have been taking hold in the market that now have the potential to become the dominant themes:

  • Risk appetite has been mounting: The S&P 500 is down more than 1 percent in the last three months. But during that same period the Dow Transports Index rose 8 percent, emerging markets (EEM) rose 6 percent, and the Russell 2000 small-cap index advanced 1 percent. If people really had been worried about recession, this would not have been the case. Technicians and followers of Dow Theory would also consider the strength in transports as a "non-confirmation" of the recent drop in the broader market.
  • The S&P 500 never broke support: The index pulled back within a channel since peaking in September. The late-2012 selling brought it only to the lower range of that channel. It held 1400 and is now back above the 1420-1430 area where it stalled in late October and early November. The SPX is also bouncing once again above its 200-day moving average and has made yet another higher low coming off the nadir of March 2009.
  • China is back: The world's No. 2 economy is back in growth mode. The current expansion has also taken shape at the same time that the rest of the globe was turning nervous about fiscal problems in Europe and the United States. Other data has also shown that domestic demand continues to take shape on the mainland--an extremely positive development. The iShares Xinhua China Index Fund (FXI) has already moved on this trend, gaining 20 percent in the last three months while the S&P 500 has been flat in the same period. I am definitely not recommending chasing the FXI here, but strength in China will lift many boats for months to come, especially energy, coal, steel, and copper. Chinese Internet stocks like Baidu (BIDU) and Sina (SINA) are also worth a look on the next pullback.
  • Materials have bottomed: Every name in this group seems to have found solid support at long-term lows: U.S. Steel (X), Alcoa (AA), Freeport-McMoRan (FCX), BHP Billiton (BHP), and Rio Tinto (RIO).
  • The Japanese yen is getting destroyed: This currency was artificially strong after the Tsunami in 2011 and amid worries about weakness in Europe. But it's been falling hard since September. At some point that's going to bring back the big, indexed "carry trades," with hedge funds betting billions of dollars selling the yen and buying commodities and emerging-market currencies. Tokyo's commitment to a weaker yen will drive that trend.
  • Volatility seems non-existent: I have my own theory on this one, which is that low interest rates globally are depressing volatility. Whatever the reason, every attempt by the VIX to rally has been very short-lived. It looks as if we're settling into a period similar to one we saw between 2003 and late 2006, with steady declines in the VIX against the backdrop of a growing economy.

Given yesterday's big rally, expecting more gains of this magnitude in the short term is probably unrealistic. In fact, we might see a test back toward the 1440-1445 area. If this does happen, that's the time to get long. The new bull market has begun, folks!


(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Jan. 2. Chart courtesy of tradeMONSTER.)

Share this article with your friends

Related Stories


Midday index, ETF option volumes

October 29, 2014

Total option volume is a bit above average at 6 million so far, with mixed action in the major indexes and ETFs, according to optionMONSTER data systems.


Midday index, ETF option volumes

October 28, 2014

Total option volume has picked back up at 5.8 million so far today, with relatively bullish sentiment in the big indexes and ETFs, according to optionMONSTER data systems.


Midday index, ETF option volumes

October 17, 2014

Total option volume has come down but is still running strong at 7.7 million so far today, with the big indexes and ETFs leading the way, optionMONSTER data systems show.


Midday index, ETF option volumes

October 16, 2014

Total option volume remains robust at 8.6 million contracts so far today, topped by the major indexes and ETFs, according to optionMONSTER data systems.


Midday index, ETF option volumes

October 15, 2014

Total option volume is again very strong, closing in on 10 million contracts already today, dominated by the major indexes and ETFs, according to optionMONSTER data systems.


The fastest money in the market
View full report »

Premium Services

Free Webinar Series

The 100K Challenge

Education & Strategy

Anatomy of a butterfly

One of the many esoterically named option strategies is known as a "butterfly." But don't be fooled: Like other advanced...

View more education articles »