Stocks opened flat this morning, which isn't much of a surprise considering that we are still a day away from the biggest news this week (Non-Farms Payrolls) due on Friday. However, that does not mean that traders aren't worried. Weekly unemployment claims were higher than expected today, the ISM survey showed that purchasing managers are pulling back across the U.S. and pending home sales took a huge hit - off 30% this month. Across the intermarket environment we are seeing other worrying signals. For example...The USD/JPY exchange rate dropped again in a very big way today, breaking support. If you aren't a currency trader - this means traders are moving into the Yen as a way to reduce risk exposure. This currency rate is highly correlated with stocks and typically a big move in this index will be followed by a similar move in stocks. Part of the driver today is broadbased weakness in the U.S. dollar itself but this will still be one to watch very closely.
The investor fear index also known as the VIX is above 30 (currently reading 34.06) after a dramatic reversal yesterday. The VIX measures investor fear by indexing the volatility in the options on the S&P 500 index. Volatility in those options rises when traders are fearful and a reading above 30 means there is a clear bias to the downside. We would expect this reading to stay above 30 for the intermediate term. This is good for option buyers (assuming you are bearish) but not as great for option sellers or writers.
Of course from a technical perspective everyone knows that most of the major stock indexes have completed a head and shoulders reversal pattern this week. If you want more detail on that check out yesterday's Ask the Expert webinar. This techincal pattern is rare, predicts large corrections (2008 and early 2009) and is one of the most reliable technical patterns technicians use to forecast market prices.
The bottom line is that while stock prices may be flat - traders are concerned about the future and that stress is being exhibited througout the intermarket environment. We will be discussing how traders can better prepare for a potential downturn in the market during today's Ask the Expert webinar so make sure to register for that at 5:00 PM Eastern.
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