By STEVEN M. SEARS
NEW YORK -- A week that began with some of the most powerful rallies in the stock market's history ended with a whimper in the options market.
Volatility, a key factor in the price of options, remained at elevated levels, while equity and index options trading patterns indicated that traders were still nervous about this week's dramatic gains and last week's dramatic declines.
The option market's fear gauge, the Chicago Board Options Exchange Market Volatility Index, or VIX, fell 1.34 to 28.90.
When the VIX declines, it normally means that traders are increasingly optimistic about the stock market. But the Thursday expiration of April options contracts likely depressed the index. That's because dealers unwound hedges that had been initiated to offset risk associated with filling options orders executed by money managers and retail investors.
Indeed, Schaeffer's Investment Research, a trading advisory firm, advised its clients that it was shifting its short-term stock market outlook to neutral from bullish because the VIX is trending higher. The VIX has closed above the psychologically significant 30 level for five of the past six sessions. "Whenever the VIX trends higher, the market tends to undergo weakness," Schaeffer's said in a Thursday research report.
Moreover, the Cincinnati firm is troubled by an increase in the 21-day moving average of the CBOE's equity/put call ratio, which is expected to continue to increase for the near term. "Historically speaking, whenever the moving average of the ratio trends higher after reaching a low in the 0.36 area, market weakness is sure to follow. This is because the optimism is being unwound, meaning those that had previously bought are now beginning to sell," Schaeffer's said.
The CBOE's equity put/call ratio was 0.66, up from 0.49 in the previous session. The ratio is traditionally interpreted as a contrarian sentiment indicator that holds that if too many traders are bullish, then the smart approach is to be bearish. The index historically has been considered a bullish sentiment indicator if it is around 0.75 to 1; neutral from 0.40 to 0.75 and bearish if it is below 0.40.
Evidence of the lack of enthusiasm for the stock market was apparent in Microsoft Corp. The software maker was scheduled to report earnings after the market closed Thursday, but the report generated very little speculation. The most actively traded Microsoft call options, the April 80, appeared to primarily attract sellers who were more interested in closing long positions and getting out of the stock than in opening May 80 calls that could increase in value if the stock rallied off earnings news.
With the stock down 5/16 at 78 7/16, the April 80 call fell 9/16 to 7/16 on Pacific Exchange volume of 6,896 contracts, compared with composite open interest of 19,696 contracts. More than 9,100 additional contracts traded at the CBOE, American Stock Exchange, Pacific Exchange and Philadelphia Stock Exchange.
By Steven M. Sears, Dow Jones Newswires, 201-938-5355
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