Superheroes know their place in the universe and in the pursuit of being good at something do their best to add value.
-Mr. Volatility

Reactions to President Barack Obama’s comments at the Group of 20 summit in Pittsburgh are the major headlines heading into the weekend. Traders are speaking of a potential “shock” in the oil market, warning oil may trade much higher. According to my work, oil and energy are the most vulnerable sectors in the short term. Any response to geopolitical concerns will reflect in a bid for the US dollar, which will pressure oil lower.

Crude Oil Futures - Weekly

US Dollar Index - Weekly

The S&P cash index closed lower by 6.40 points or .61% at 1044.38. The S&P mini futures contract closed at 1041.00 — 4.75 points off it’s low print of 1036.25, which was printed just after 10AM PST.

ES - 15 Minute

Overnight, credit spreads in Asia were wider by 9% on bearish news out of Aiful as well as a 30% dilutive secondary offering out of Nomura Holdings (8604.TSE). In the states, credit spreads were wider across the board. Default swaps were active with about 7 wideners to every tightener.

Gold came into the week at $1,006.15/oz. and closed slightly lower at $991.35/oz. Crude oil closed a tad higher today, but lower on the week to settle at $65.05. Crude has broken lower out of consolidation in what could be a harbinger of further weakness in the near term.

Crude Oil - Weekly

Research In Motion closed lower by 17% at $68.91, just above it’s low print of $68.47.
The $VIX closed at 25.61, up 2.65% on the day.

I’d sum up this week’s trade in equities as mildly distributive. I saw evidence of defensive posturing (risk aversion) amongst traders. In order for the sell-off to gain momentum, we will need a catalyst. What that catalyst could be is yet to be known. The situation will continue to be monitored and the beat will go on.

The S&P cars roared out of the gate and climbed a few points on euphoria from the better than expected employment claims headline: 530,000 versus 550,000 expected. 30 minutes after the open, existing home sales hit the wire and were light of expectations: 5.1 million Vs. 5.35 million expected or -2.7% month over month. After selling off, the market traded in a range for the remainder of the session, closing lower by 10.09 or just under 1%.

S&P 500 - September 24, 2009

Oil and gold mirrored weakness in equities as the dollar was well bid. Inversely, the Euro was weak.

US Dollar - 15 Minute

Volatility is beginning to pick up and closed higher by 6.22% at 24.95.

VIX - Daily

Credit spreads were wider across the board. US bonds were well bid. The 7 year $29 billion auction drew 3.005%, bid to cover ratio: 2.79 Vs. 2.63 prior. Indirect bidders took 61.2%. Even Rick Santelli — who grades on the curve — gave the auction an A.

After hours, Research In Motion (RIMM) traded lower on lighter than expected top line revenues and weak year over year margins: 44.1% Vs. 50.7% a year ago.

I have been cautious and positioned for risk aversion — strong dollar, weak equities and commodities. The market is pulling back and distribution is increasing. I will continue to watch how players react to the distribution. Whether this pullback will develop into something more meaningful is yet to be seen. For the short term, the path of least resistance is lower.

And the beat goes on.

The world changed from having the determinism of a clock to having the contingency of a pinball machine.
-Heinz Pagels

I am no stranger to predicting wild moves in volatility. Guess what? I’m back. I sold my oil puts today. What did I do with the money? I bought calls on the Ten Year. Below is a monthly chart of the Ten year (ZN) and the $VIX. If you think volatility trades higher, than you are thinking like me.

If you cannot view the ten year futures, you can look at the bond etf (TLT).

Peace

znvix

1) I think oil trades lower and I own a few puts.
2) In a Happy Day’s episode filmed in the late 1970s, Fonzie obtains a library card and declares, “Reading is cool.” The following week there was a 500% increase nation wide of children obtaining library cards.
3) The trend is your friend, til the end, when it bends.

Peace

Oil