Distressed Volatility

I can't stop posting about the indices because the market is at an inflection point of either a surprise rally or a HUGE move to the downside. I'm going to look at the long term trend and near term sentiment indicators, including the 25 year chart of the Dow and S&P 500 from barchart.com with technical analysis. Both charts show the 25 year long term trend line hitting today at lower levels. More significant in the S&P than the Dow. Click the pictures to zoom in.

Now looking at near term sentiment with options of the DIA and SPY (exchange traded funds) I see that implied volatility spiked recently due to the pending announcement of Lehman's fate, as well as problems with AIG, WaMu and issues with our economy . It looks like the SPY has more bearish sentiment than the Dow because it's Put/Call Open Interest ratio is much higher and it has very high open interest concentrations in some out of the money puts. The DIA has a Put/Call OI ratio of 1.03 and the SPY has a ratio of 1.57. Comparing the option volume, the DIA has more calls being traded than puts having a Put/Call Volume ratio of .78 (near year lows), and the SPY has a ratio of 1.40 which is a huge difference. If you look at the DIA Open Interest Configuration at schaeffers research there are actually some huge concentrated call positions at the Sep and Oct expiration's which is surprising. I'm thinking that the S&P 500 has more exposure to the banking sector giving it more negative sentiment.


Dow Jones Index 25 Years (barchart.com)

S&P 500 Index 25 Years (barchart.com)

SPY Open Interest (schaeffersresearch)

Also this just hit the Wall Street Journal at 2:00p Sunday (9/14/2008)..

"Barclays claims to be walking away from a Lehman deal but could return, sources familiar with the situation say. The current deal structure would require a Barclays shareholder vote. Government reluctance to provide funding remains a deal hurdle. More details to come." Full Article

This could get ugly.