Tuesday, March 1, 2011

Dow Jones down, VIX and oil up, Rajat Gupta insider trading fraud news not helping either.

Rajat Gupta
Photo by Mackson
It looks to me some parts of the market have finally caught on to the unrest in the middle-east. It's main factor of course being oil. The recent spike in oil have investors on wall street worried it will slow down not only the US economy but the global economy as a whole.
Another breaking news item that weighed down on the markets today being that of Rajat Gupta's insider trading case that could even be bigger then Bernard Madoff's ponzi scheme! He was charged by federal regulators. Certainly not helping investor's confidence.
The result?
As of right now the Dow is trading a whopping 168 points lower so far.
As I mentioned in previous posts a few days ago, the VIX (volatility index; a.k.a the panic index) was trading in dangerously low territory. Under these global market circumstances (meaning the unrest in the middle-east) the VIX trading under 20 is relatively a low number, sooner or later it had to spike up, ...and it did.

It surprised me how even with all the turmoil that has been going on in the world, especially in the oil sector how low the VIX was trading, and how the Dow Jones was hardly affected by all this, booking gains after gains. To me it was almost like; "Does no one look in the other direction (meaning the middle-east) and is seeing what is going on in that part of the world?"
Not only Libya's oil production has literally come to a halt but also in Iraq, one of its important oil refineries was attacked stopping oil production there as well. You really don't need a crystal ball for this, sooner or later this was bound to happen.
The main question is now; where to go from here. The markets are extremely volatile right now, pretty much anything can happen.
Let's take a look at the overall picture first;
We went from the Dow almost touching 12400 on February 18 to about 350 points lower today. Like I said earlier, this was mainly caused by the spike in oil, but now that there may be another fraud case on wall street, it wouldn't surprise me that we go below 12000 soon.
I don't think this is ground for a double dip recession, but it certainly makes a big dent in previous gains on wall street, thank Mr. Gupta for that.
As of right now, I'm keeping an eye on oil and oil etfs, especially leveraged oil etfs/etns (OIL) can result in nice returns. As far as the VIX (or VXX) goes, there is a good chance it will spike higher this week. Depending on how the news around Rajat Gupta plays out, the DIA (Diamond) is pretty cheap now; a bull call spread options position is the one I'm thinking about.
Well see how this shake up will play out.

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