At first glance of today’s market moves, the action looks very tame. However, there is some serious movement going on under the surface. Indexes are all slightly higher, between 0.1% and 0.6% each, but specific sectors and names are soaring. There is substantial strength in the agricultural sector, as corn and soybeans are ripping higher. Additionally, highly-shorted momentum stocks are also flying. Some of these names include TSLA, GRPN, DDD, NFLX, CZR and SODA. Whether it be short covering or fresh bullish positions being initiated, the action in these names must be respected, as many are breaking to new highs on significant volume. Other areas of the market are fairly tame today, as early strength in gold and silver has reversed. Both metals are trading near breakeven on the session, while bonds are near flat as well.
CHART OF THE DAY
Caterpillar (CAT) – The industrial equipment maker has been trading in a very choppy range for the past few months, but it’s beginning to show signs that a big move could be forthcoming. The shares are currently trading in a big triangle pattern, which should resolve itself in the near future. Additionally, the Bollinger Band(bottom pane in the chart below) with is at an extreme low on a weekly basis, which could be indicative on upcoming volatility expansion. On the sentiment side, short interest has soared as of late, up nearly 80% since April. This creates an increased potential for volatility going forward. Lastly, options are currently priced near the bottom tenth of all readings seen in the past 52 weeks. This makes a long volatility strategy attractive.
I like buying a straddle here with longer-dated options. Subscribers to Schaeffer’s Volatility Trader received this recommendation last week. I would buy the November 85-straddle for about $7. This trade will profit on a move above $92 or below $78 by November 15, 2013. This will give ample time for the trade to play out, and also incorporate any move on CAT’s upcoming earnings report.
WHAT I’M EXPECTING
The S&P 500 topped near 1670 today. Given this recent rally, the risk/reward on new trades certainly resides with the bears here. I’m looking for a downside move from here going forward, potentially breaking last week’s lows. The one risk to new bearish positions here and now is that this week is historically very slow(the week before Labor Day), and the old adage is “Never short a dull market.” Should the SPX close above 1675, I will deem myself wrong and rethink going forward.