The markets made a mad dash out of the gate to start off 2011 on a high note. The S&P 500 rallied more than 1% and the NASDAQ 100 touched a ten-year high. Volumes were busy in the morning, but slowed notably into the afternoon and ETFs on the whole were busier than single stocks (keep in mind that China, Australia, Japan, and the UK were all closed today).
There was a lot of talk on the desks about new money coming into the market as investors allocate back into equities despite the upward move in 2010. It is important to note that the first few trading days of the year are psychologically important to traders. According to the Stock Trader's Almanac, January's first five days has a legitimate record of forecasting the direction of equities for the month, which in turn usually determines the direction for the year.
The Dow Jones Industrial Average ended up 93.24 points, or 0.81%, to close at 11,670. The S&P 500 rose 14.23 points, or 1.13%, to close at 1271, and the NASDAQ was up 38.65 points, or 1.46%, to finish at 2691.
In terms of catalysts for the move, the underlying driver remains growing investor optimism towards the economy. U.S. manufacturing activity continues to tick up and construction spending rose more than expected. Meanwhile, data from China over the weekend showed manufacturing activity in the world's fastest growing economy slipped for the first time in five months. The slowdown lifted hopes that China will not take steps to curb inflation by raising interest rates.
CBOE Volatility Index ( VIX) traders adjusted call positions as implied volatility decreased on larger standard deviation moves of stocks on the first trading day of 2011. VIX closed down 0.79%, at $17.61. Overall, 114,000 put contracts traded compared to 244,000 call contracts, with January 35 calls as the most active series on 42,200 contracts.
SPDR S&P 500 ETF ( SPY) bullish out-of-the-money put sellers continued to win as the market rallied and implied volatility decreased. SPY touched a 52-week high to close up $1.30, at $127.05, on 994,000 put contracts compared to 601,000 call contracts . January put option implied volatility of 15 is low compared to SPY's 26-week average of 22. Contrarians who have purchased puts on the expectations of a market pullback and an implied volatility increase have been the net loser's today and over the last four-months.
The PowerShares QQQ Trust ( QQQQ) January 57 calls dominated volume on 49,600 contracts, suggesting sophisticated pros may be panicking on fear of being left behind. The Qs closed up $0.85, at $55.31, having touched a ten-year high. January 57 calls were the most active series traded on 229,000 put contracts compared to 244,000 call contracts. January call option implied volatility is at 14 compared to its 26-week average of 22.
United States Oil Fund ( USO) volatility traded at three-year lows as oil approaches $92.00. United States Oil Fund (USO) closed up $0.05, at $39.05. WTI Crude futures are up 0.60% to $91.93, according to Bloomberg. USO unit net asset value reflects the performance of the spot price of West Texas Intermediate light crude. USO overall option implied volatility of 28 is near its 26-week average of 31, suggesting non-directional price movement.
The events calendar will continue to gain momentum as we move through the week of January 3, after taking off for much of the back half of December. Economics will be in focus, as investors digest the first data points from December and Friday's labor report. The minutes from the last Fed meeting will get released on Tuesday. There isn't too much anticipation ahead of this although traders will be looking for any nuance regarding the Fed's commitment to curtail, expand or leave unchanged its QE2 program given signs of improvement in the economy. On the corporate front, investors will be focused on retail same-store sales releases due to be released Thursday.
Similar to 2010, issues that traders will continue to monitor for 2011 include:
Long-term U.S. interest rates
U.S. employment market
U.S. and Euro zone home-price stability
Euro zone debt issues
Emerging market stability
Commodity pricing inflation
China's management of its economy
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