BigTrends

JP Morgan reported earnings early Thursday, and beat estimates handily. They guided somewhat higher, but who really knows what they could earn in a sluggish economy. But what caught me was something in the conference call.

CEO Jaime Dimon made some interesting comments, but one struck me as a big 'tell' in the market. A 'tell' is something that give you an idea of what someone feels or thinks. In this case, Mr Dimon stated that 'We are not sitting here terrified of deflation'. Now, JPM has a well-known relationship with the Fed and Treasury. We know what Bernanke fears: deflation which can merge into a depression...and he'll do anything to avoid it...even dropping bags of money from helicopters.

So, I'm sure Mr Dimon and JPM are comforted to know that the Fed and Bernanke have plenty of ink in their machines to get the flow of money rolling again.

With the big surge in volatility at the end of the week, expect to see some wide ranging action, especially with the confluence of events.  The rise in VIX was a shaker to be sure.  Earnings really get underway and Apple kicks off the week, Bernanke confirmation vote which should be affirmative, a two day fed meeting and then the end of the month is upon us, where we generally see some positive energy.  We'll have to see if the bulls can gain the upper hand here as I expect the aggressive selling to ease up this week.

It sure has been a nice ride in 2009 and the start of 2010, but as the jobs number for December just came in at a negative surprise of -85,000 jobs lost last month, when many were expecting a gain, tells us the market may react negatively. Sure, you could say that means the Fed stays looser longer, but they can't get much looser than they already are. (BTW, Ben Bernanke as Time's Person of the Year tells me that yes, he stopped 2009 from being the next great depression, but by creating every form of stimulus known to man, in my book this tells us the next great surprise is MONSTER inflation in a few years).

Check out these chart of CBOE Volatility Index (VIX) vs. S&P 500 Trust (SPY) below. You can see from the BigTrends Charts (see Tools & Resources page to create these yourself), with a 20-day Acceleration Band in red and the 20-day Bollinger Band in green, we're scraping near the low end of the range for the VIX, showing much complacency. The last several times this happened, the market was headed for a correction in the coming weeks.



Not coincidentally, the SPY is right at the upper end of its range. Yes, it's hit new highs, but this is an uptrending channel here, and we're at the upper end of the channel. So be careful out there, trail your stops tightly, and prepare for some selling to come to spark renewed fear which should create the next great buying opportunity in 2-3 weeks. Looking at the bands, look for VIX to pop up near 24 at least, and the SPY to dip back down to the 110 area before we get the fear spike needed to mark a short-term bottom.

Editors Note: Thanks to the New LiveVolPro.com for Charts and Information Below - We are Currently Running a Full Review on the World Class Volatility Program, in the meantime you can check out the free version here (LiveVol.com). 

Around 12:35PM on Wednesday just 90 minutes prior to Bernanke & Co. released the ‘official' outlook on the US economy a large options trade was placed in a benchmark bond ETF.  The Lehman 20+ Yr. Treasury Bond ETF (TLT) saw heavy options action in the form of what looks like a bearish leaning straddle trade.

January 115 PUT

Images Courtesy of LiveVol.com


January 115 CALL

Image Courtesy of LiveVol.com

Traditional Straddles employ the use of buying an ATM call and ATM puts where the buyer's expectation is increased volatility (in either direction).  In effect, one side goes worthless while the other side increases in value theoretically netting out in a gain.  Generally, volatility must increase a substantial amount fast and buyers should also be concerned that this expectation may already be priced in.

Profit/Loss TLT 115 Straddle

In today's case, the large option trade can be broken down into a bet on treasury volatility with a bullish bias on bond yields.  TLT reflects the price of bonds, which trades inverse to yields.  Effectively, the buyers of the bearish straddle expect rates to increase, either in the short-term or certainly before January.   As of now the total investment is around 11.5 million, a hefty gamble to make 90 minutes before the FED statement.  

TLT 3 Month Chart with Implied Volatilities 30, 60 90
Image Courtesty of LiveVol.com

While we've had a solid market move, four up weeks in five, there seems to be a wave out there for a drop.  Well, it could very well only be a correction.  The drums are beating harder each day the market does not drop hard, and that could be a great contrarian indicator.   You see, this market has defied all odds.  Stretched like a rubberband in March, the slingshot move since has been historical.  Sure, you can compare this latest move with others in history, yet each case is unique.  A different (and larger) class of investor is in the game now, and momentum is the name of it. 

We get the Fed announcement on Wed, then later in the week Chairman Bernanke will testify about the whole BAC/MER mess that occurred last fall.  The first part is mostly dressing...we don't expect much from the Fed other than to say they could keep on buying treasury bonds, helping to keep rates low.  The testimony in front of Congress is going to be interesting.  What role did Bernanke play?  Was it illegal?  Will he implicate others?  President Obama is watching carefully, and if it doesn't pan out well we might have a new Fed Chairman next spring.