The Contrarian Trader

Stock market, economic and political analysis for the intermediate term stock, commodity and equity option trader.

Archive for the ‘general electric’ Category

The “VIX” is in…..

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Yes, the Volatility Index also known as the VIX put in a new multi year intra day low last week. What you can read into that event is that there is little to no fear in this market. So yes, the “VIX” is in for what could be a nasty sell off in this market. The theme of the week last week was the pumping of the Airline Stocks on merger and acquisition talk. By the end of the week the sector’s prices had returned to where they started, once again the little guy was left holding the bag. CNBC received the order from home office to pump the stock of their parent company GE which broke out on huge volume. The S&P 500 “broke out” this week to brand new highs but, don’t get to excited. Friday’s price and volume action was very disappointing. You may say that I am nuts! What is wrong with me? The index closed higher on huge volume. What could be wrong with that you say? In a word “churning”. When you have an up day on huge volume that we saw on Friday you would expect more of a point gain. What we can interpret from the price and volume as we saw on Friday is that there was a lot of sector rotation and profit taking. The Banking Sector also continues to help support this market. When will the rally on the S&P 500 be over? Watch the BKX ,when the Banking Index finally begins to correct you’ll see a market decline because it’s the banks and the winged tip jackals on Wall Street with their computerized trading that is keeping the market up. On the NASDAQ we saw similar price and volume action that accompanies churning. The Semi Conductor Sector continues to struggle to break out above its current resistance levels. Without the participation of the Semi’s it’s going to be difficult for the NASDAQ to have convincing break out. The markets are extremely overbought and two weeks remain in 2006. We are not predicting a sell off in the markets until after the early 2007. The PE ratio on the S&P 500 is now around 20 which have in the past few years represented a top of the trading range. With decelerating profits it’s hard to justify the rally and expansion of PE’s. All hopes are pinned on the FOMC reducing interest rates in early 2007. With job markets still strong and the threat of wage inflation as well as core inflation it’s going to be hard to make the case for a reduction of rates. Add to the list the declining US Dollar which would further deteriorate if the FOMC lowers rates. Sure, the US Dollar had a strong week on the back of Bernanke and Paulson going hat in had to China but I wouldn’t expect the rally to continue. It’s a new world and the Communist Chinese are our number one financier.What I expect to see happening for the remainder of the year is more of the same. Pre market you will see CNBC hype the market by “reporting” via company and sector upgrades and then the subsequent squeezing of the shorts and a continued rally of the banks which will prevent a major sell off. Using history as a guide it’s highly unlikely to see the markets sell off. The markets are overbought but they can stay overbought for a pro longed period of time.We will cover our current holdings in Monday evenings Contrarian Commentary. We are planning to add to our current short positions to take advantage of what we see as a fantastic opportunity to profit from the coming correction.If you have any questions please feel free to email me at Robert@TheContrarianTrader.com Robert Desmond

President & Chief Investment Strategist

The Contrarian Trader