After a weak start to the day, markets have bounced and are back near their opening levels. Much of this could be attributed to comments made by Ben Bernanke, as he testified before Congress today regarding the state of the economy. Last week, there were concerns that the “easy money” spigot was about to be turned off, and quantitative easing was close to ending. However, Ben doubled down on his stance today, stating that they’re aren’t any plans to end the current accommodative environment anytime soon. As you might expect, metals rallied sharply on the news, and pulled markets higher with them. Currently, both gold and silver are higher by upwards of 1%, along with the miners. The Dow Industrials are leading other indexes, up 0.7% on the day, with the S&P 500 0.5% higher, the Russell 2000 up by 0.4%, and the Nasdaq up by 0.3%. After a strong open, bonds are slightly lower, down 0.2% at present levels. After yesterday’s massive spike in volatility, the VIX is off by about 10%.
CHART OF THE DAY
Valero Energy Corporation (VLO) – Refiners have been on a tear recently, and VLO is no exception. The equity is up over 30% year-to-date and about 80% over the past 52 weeks. Favorable economic conditions remain in the refining space, and names within the sector should continue to move higher. VLO recently reported better-than-expected earnings, and the equity moved significantly higher. Since then, VLO has consolidated nicely and appears to have found support from the 44 level.
Despite great strength in the name, sentiment in the options market remains very skeptical toward VLO. Currently, there are over 1.5 puts for every call in the front three months’ open interest. This number ranks in the 97th percentile of all readings over the past 52 weeks, and shows extreme skepticism toward VLO. An unwinding of these bearish bets could act as a tailwind toward the stock. I like an entry here with a stop on a close below 43.50. I would initially target a move back to the multi-year highs near 48, with stretch targets of 50 and 55.
WHAT I’M EXPECTING
Despite today’s midday push higher, I expect bears to remain in control until we can see a pullback of some significance. 1474 on SPX continues to be my initial downside target. Until then, trade the range and/or pick stocks. Although today’s intraday reversal has been nice, the fact that we’re being led higher by the Dow isn’t the greatest sign for bulls. Small caps and financials have lagged for the past few trading days, and I would like to see them regain leadership before becoming more constructive on the market.