Labor Report, Fed Minutes Add to Traders’ Cautious Stance

by Stutland Volatility Group | April 6, 2012 6:30 am

Today’s Good Friday holiday will not necessarily be a holiday for market watchers this year. As it happens occasionally, the U.S. Department of Labor has decided to release the monthly Employment Report even though the markets will be closed.

Preliminary expectations are for a gain of 230,000 non-farm payrolls and a jobless rate of 8.2%. While these expectations are basically in line with the past couple of months, this decision creates an interesting dynamic as we head into a long weekend.

The inability to trade the news Friday morning will most likely keep volatility expectations higher than usual. Many traders and market participants likely cleaned up their market exposure Thursday afternoon ahead of the long weekend.Chart of VIX
Click to Enlarge

After a solid start to the week, the SPX lost some of its mojo heading into the last trading day of the week. Comments from Federal Reserve minutes released on Tuesday appear to be the catalyst for the current selloff. The Fed signaled that further bond purchases may not be necessary, and the Fed will most likely take a wait-and-see approach. 

Needless to say, it is not surprising to see the markets back off as participants make some adjustments to their current exposure. The CBOE Market Volatility Index (VIX) has been quick to react to the morning sell-offs; however, a VIX chart shows there have been implied volatility sellers in the S&P 500 Index (SPX) in the past couple of days as the VIX has closed off its lows.

Technically, the general pattern in the SPX does raise some concern. When we take a look at the past three weeks, the SPX got off to a good start on Mondays only to lose momentum in the middle of the each week. Further depreciation of the SPX into the weekend would signal the very real possibility of a test of the 50-day moving average of 1368.61.

Chart of SPX
Click to Enlarge
Psychologically, it will be interesting to see how the SPX reacts to the close below 1,400. Observing the sentiment in the CBOE options pits, there appears to be very little concern for a major pullback at this time. As mentioned above, the VIX has sold off into the close each of the past couple of days. Volatility buyers in the morning are quick to sell on any hint the intraday move has found a bottom. To us, the general malaise in the options market is a “red flag,” particularly when coupled with the technical analysis above.

Stutland Volatility Group believes the market is entering a precarious period, and for the first time in quite some time, implied volatility levels are actually offering some value relative to a potential volatility squeeze on any further deterioration in the SPX.

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