OPTIONSMART MORNING UPDATE: Sunday Edition

1. OUTLOOK: Investors welcomed better-than-expected profit reports from JPMorgan Chase and Intel, but opted to sell shares regardless. A mild reading on inflation, a mostly in-line reading on manufacturing and a better-than-expected report on consumer sentiment were also in the mix. JPMorgan had incredible earnings, but their credit card writeoffs were bigger than what investors were expecting. Market breadth was negative.  This pullback is expected to be short-lived (see our FEAR METER below). 

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2. FEAR METER: QQQQ implied volatility drifted lower as bullish sentiment still prevailed. 

About Implied Volatility.  Investor fear and greed play a significant role in financial markets. The question is, how can investors measure market sentiment in an emerging market situation? How can they gauge the fear? Volatility is a well-known measure of risk in financial markets. When volatility is low, there is a lack of fear. High volatility, however, suggests a fearful markets. Volatility can be calculated in two ways. Either from historical stock price data or from current option price data. Using the second method results in an implied volatility measure. It is a reflection of fear and greed amongst a wide group of market professionals. It’s not wise to ignore this parameter.

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