Just after a tremendous rally the market returns to yesterday’s low in light trade. Crude oil continued its decline and while it is good news for consumers. On the flip side, producers of the commodity and highly levered are not in good shape. Fears are certainly heightened as the VIX jumped more than 24% today reaching its highest level since October. Leading the markets lower was the Russell 2000 closing lower by more than 2%. The NASDAQ wasn’t far behind losing 1.7%. It appears our neutral stance continues to be the right play here. Yesterday was a solid day, but lacked volume on the NASDAQ to get behind the reversal. Today’s move highlights why it is important to stick with your process and not get overly excited about one day. We remain neutral in this market environment.
Just before the close of the session the market approached yesterday’s low. Specifically, the NASDAQ was about to plunge through its low and buyers were able to save the index. The question we need to have answered is whether or not we are going to get further distribution. We do have 3 days of distribution and unstable price action here warrants caution.
What everyone is now worried over is the highly levered Shale Oil and Gas producers. While Natural Gas prices are lower, they have not had the major declines we have seen in Crude Oil. Crude oil is barely keeping in the 60s. At some point we may find out the true reason for the fall. It could be oversupply, but it doesn’t matter to us. Where the real pain will be felt is certainly with the high yield debt markets. HYG and JNK have suffered some pretty big losses. Many tie the turn in high yield markets to decline in equity markets. However, at this point shorting these names is quite an obvious move. We will likely hear stories about hedge fund liquidations and potential defaults. How the markets react will be very interesting and as usual price will dictate our actions.
Fear is certainly on the rise and nearing levels were we have seen the market push higher. We get our plethora of sentiment indicators tomorrow and it will be interesting to see how bulls and bears have responded to the recent market developments. Stay tuned.
