Tuesday, March 10, 2009

Citigroup, Zombies, Bottoms and a Sub-45 VIX

Two hours into today’s session and a 4% rally in the SPX seems to be holding – at least for now.

One of the catalysts for the rally was a comment made by Citigroup (C) CEO Vikram Pandit in a letter to employees that confirmed the bank made an operating profit in the first two months of 2009 and is on a trajectory to record the best quarter since Q3 2007 – the last time the bank booked a quarterly profit.

So…all of a sudden we have Citigroup looking profitable (for a stretch – and only on an operating basis), the possibility that zombie banks might be able to earn their way back to the land of the living (see my January comments about John Hempton’s analysis of this situation) and a devil’s bottom, where last week’s SPX 666 mark now appears as if it may hold up for at least a little while.

The risk/reward profile of the market may now be turning around, especially when Nouriel Roubini comments, “My main scenario is that it’s highly likely [the SPX] goes to 600 or below...500 is less likely, but there is some possibility you get there.”

After 13 of 16 down days for the SPX, it was only a matter of time before even several pieces of good news randomly clustered together to produce a bullish bounds, but…will it last?

As for the VIX, which is now hovering at the 45 level, the one day bounce does alleviate some short-term fears. The big change in the VIX is not due to technical support levels in the SPX, however, but to the changing macroeconomic landscape, where there is a glimmer of hope on the horizon for the first time since what seems like just a little bit after the invention of the ATM. While VIX is sensitive to technical trends in the markets, ultimately it is a product of macroeconomic and fundamental uncertainty. As the list of possible future universes gets culled down to a manageable, believable and ultimately palatable number, a sub-45 VIX will once again become the norm.


Eric said...

In order to evaluate if this is the bottom or a bear market rally, I think we need to look at the remaining issues that are facing the U.S. and World economies.
Jobs: I think we are addressing this, and I believe other countries are providing or will provide additional stimulus. Hopefully we don't see any acceleration. I think 10% is baked in.
Consumer Credit: This scares me, especially with the rate at which credit lines are being cut. I am hearing enough anecdotal evidence to make me think AMEX is in big trouble and will create a self-fulfilling consumer credit crunch. Bernanke mentioned addressing this specifically, but I think this may be too hard to stop in the near term.
Housing: I almost think an additional 20% drop in home prices is already priced in to the market.
Stimulus: I know, addressed in jobs. This is the single most frustrating thing to me. History repeats itself and I actually think more stimulus is needed. WWII led us out of the depression because we had a singular purpose and the government was able to spend like crazy without much resistance. "Republicans: are you listening?!?!" Your efforts to protect yourself in the near term are going to bite you in the end.

stonebat said...

"bear market slides down a slope of hope"

another false hope is creating another hill to slide down later. shorts r taking a break. thats all. hopefully the fake hope lifts the market much higher. kinda sickening... but i bought some yesterday. ready to sell when vix gives a sell signal on big up day!!!

Eric said...

Stonebat, what do you predict on the downside, eventually, not near-term? And what sell signals are you waiting for?
I am erring on the cautious side, I am near-term bullish mostly on a buy the rumor (m2m, uptick) and on oversold indicators. When SKF spiked to 260 I jumped into financials with both feet. But I plan to jump back out very quickly.
When I jump out of my long positions, it will be to wait it out, I can't justify being short here, but then again, if we get a 20% Dow/S&P bounce, it gets interesting. If I do go short, it will be AXP and Capital One (COF) most likely. I may put on a pairs trade, long MA, V. MA & V have no credit risk, just volume risk. I think AXP is in real trouble, especially since their mix of spending has turned away from business expenses (good) to consumer debt (risky).
Position: Long SKF Puts, USB Calls, Long GLL, Short GLL Calls & General Dynamics (GD) is looking tasty (capitulation bottom).

stonebat said...

i know a list of many indicators that many investors know. i select a set of them depending on the market condition. i have no formula on how to create the set. but i look for a clear pattern that can explain the market direction. when it reaches one extreme side, i focus on volatility analysis. options spread in VIX. VIX:VXV ratio. SPY options & implied volatility, gold, oil, bond, etc. sometimes they give out a strongly coherent signal. that just means there is less risk to start to build a position, but there is still risk. usually those signals are a bit early... a day, a week, a month... so there is no need to hurry up.

so... i have no idea when the market will tank. i will just sit tight and think about the next strategy.


stonebat said...

the bottom call was too early... again. gotta wait until march OE.

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