Securities Research Services

Tuesday, June 06, 2006

Last Tuesday Revisited

There is something familiar about yesterday's market sell off. It seems like we have seen days like this before. Oh yeah, we had a day just like this last Tuesday. What is also like last Tuesday is the inordinate amount of options traders who are betting on further declines. Two put options were purchased for every call. You would think they would have learned a painful lesson by now but they keep coming back for another dose of pain.

The VIX, volatility index, took another jump yesterday as well. The similarities between yesterday and last Tuesday are mirror-like. The similarities between the market's behavior over the last two weeks and the way the market behaved during the last two weeks last October are also mirror-like in their similarities. The QQQQ still has support at $38.50 so unless that level gets taken out we seriously doubt that the shorts will see much momentum develop. In fact, historically days like yesterday have proven to be buying opportunities.

Yesterday the market sold off when the Fed chair Bernanke spoke about inflationary pressures with hawkish tones. Regardless of what the Fed actually does next the chairman must speak with hawkish tones in order to constrain inflation expectations. This is normal in the late stages of a tightening cycle. We would argue that the Fed is very close to taking a break in rate hikes despite what fearful traders thought yesterday afternoon.

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