Shrinking volatility: bullish consistency or bearish complacency?
As of the close last Friday, the weekly trend analysis for the major indices remains all or mostly positive, indicating that the intermediate- and longer-term uptrends remain intact. One possible concern could be the semiconductor sector (as represented by the SMH), which was showing strength only a couple of weeks ago but is now mixed to negative.
New position
Last week I had in place limit orders to sell puts on perhaps two dozen different stocks, many of which fell into my target price ranges. However only one triggered – I sold some March 22-1/2 puts on Sanderson Farms (SAFM), which has been falling on profit concerns due to falling chicken prices (and fears of the possible effect of the spread of avian flu).
As for why more of my other orders didn’t trigger, contracting volatility (even as the stocks declined) was the culprit. I’m not sure whether to interpret this as normal behavior confirming an uptrend (the VIX tends to decline as the market moves up), or a bearish sign of complacency on the part of bulls (i.e., fewer put buyers). Perhaps it’s a sign of both, each with different near- and intermediate-term implications – but which is which?
Watchlist
I added two new stocks this week to the “beaten down” stocks watchlist: St. Jude Medical (STJ) and Standard Pacific Corp. (SPF). I’ll probably look to sell puts on these stocks on further declines (to about the 40 and 30 prices levels, respectively).
