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[Figas]

MONDAY a.m.
August 11, 2003




Not So Healthy
by David Nichols

There's something about this market that doesn't strike me as healthy for the upside, and that's the behavior of the VIX during this latest rally. The market cycled into a short-term "advance phase" for sentiment (in hindsight) right when the VIX crested in the opening hour last Wednesday. The VIX has dropped like a stone since that point. This is evidence that market participants have a degree of comfort with their predominantly bullish positions, as there is rapidly fading demand for protection or speculation in the options market.

But the market just hasn't gotten much work done to the upside during this window of opportunity to advance. This feeling of comfort is not being caused by strongly surging prices. That's a danger sign.



We can also see on the daily chart that the VIX has dropped all the way to the bottom of its recent range , yet prices are just grinding back up. If this were a healthier market, sentiment-wise, then such a drop in the VIX should have sent the S&P 500 towards the top of its range at 1015. It should have gone a lot further than 977, that's for sure.



This argues strongly that the next time the VIX pops up the downside price acceleration should start in earnest. The stage is now set, with this weak advance phase. The next time people feel that twinge of fear, the selling should be more dramatic.

However, it's options expiration week. Often this means nothing much happens. But as Adam also points out below, if something gets cooking early on during expiration week, then it can start to free-wheel in that direction if there are too many wrong-way bets out there.

Sentiment Dashboard
by Adam Oliensis



SENTIMENT TANK: Drained 3 points to 12% full of negative sentiment on Friday.

SHORT-TERM: In a mature advance phase. The snapback down from the pip up on the tank may have exhausted itself.

MID-TERM: Progressed 3 points to 61% in its decline phase. Confidence is at a neutral reading of 0.

LONG-TERM: Progressed 3 points to 7% on the decline side last week. Confidence is also at a neutral 0.

BOTTOM LINE: The tank popped to a key horizontal level last week and backed off. There was a brief bout of bearish momentum, but it subsided as quickly as it arose. While confidence levels are at 0 right now, the market is at a vulnerable point, ripe to fail on the retest up to broken support, which is now resistance.

Options Expiration, which arrives after the close this coming Friday, could keep the market pinned in a narrow range. If that range breaks, however, then the broken dynamic tensions exerted by options players hedging gamma pain could squirt the market more crazily than reason would expect. So, we're looking for a quiet week, but if it heats up then the light volume and Expiration Pressures could make it precisely the opposite of that.