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| Stocks: 2005, Week Two, Day Nine - Jan. 14, 2005 |
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Summary
After last week's writing blitz about the stock market's entry into 2005, I've authored nothing since. There simply was not much new to write about. Yesterday's performance changed that. And it changed it in a way that may prove more important than meets the casual eye.
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When the fade in stock prices set in yesterday afternoon, it set in with some gusto. By the close, my seven-measure tracking group was down an average 0.8%. All components were in the red, with declines running in a range of 0.5% (Russell 2000 and Value Line), to 1.1% (DJIA). The end of the world this definitely was not, but it's important to note that the majority of the day's losses came in the last hour and a half or so of trading.
Also of importance is that yesterday's close took out the prior low closes set during 2005 to date. Tuesday's (1/11's) close had eclipsed last week's lows; yesterday's lows took out Tuesday's.
Around the third week of December, I was emphatic in expressing my misgivings about how this year would begin for the equity market, opining:
"Some of the bad things not happening to the equity market in 2004 have merely been postponed, not canceled. It is becoming easier to envision an early year 2005 sell-off that could be rather pronounced."
Through yesterday, the tracking group was down an average 4.0% for the year (median decline of 3.3%). Year-to-date losses ran in a range of 2.6% for the DJIA, to a substantial 6.4% for the Russell 2000, which was one of 2004's stellar performing proxies. Through yesterday, in a mere nine trading sessions, the Russell had shed more than 37% of all of last year's price-only gains.
It is possible that a new consideration is entering the picture, which is next week's options expiration.
As you bear down on these events, they become increasingly "level-specific" in nature. Assumptions are made regarding expiration levels, which you can witness in the bunching of open interest and in the trading volume and activity in various expiring contracts, be they index options or equity options. In my view, the most egregious manipulative feature of all this is the appearance that these assumed levels are "defended" in the marketplace.
But what's the old axiom about the best laid plans? Although we are a week out from the expiration, a three-day weekend is approaching, making next week's market activity a four-session affair. In turn, this consideration, coupled with yesterday's price slide, might be creating behind-the-scenes angst in certain circles.
This said, you certainly cannot detect it in the CBOE Volatility Index ("VIX"). The VIX ended 2004 at 13.29. Despite the pummeling the market has taken so far this year, the VIX finished yesterday at 12.84!
At any rate, all this makes today's market behavior incrementally important. In my opinion, anything resembling another "yesterday" means a seriously raised level of danger for next Friday's expiration.
Over the weekend, I plan to eyeball next week's expiring contracts, with particular emphasis on puts. It is this area that poses the greatest danger for the LaSalle Street/Wall Street axis powers!
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