Volatility Rises As Market Takes Pause

Volatility rose sharply, 19% to end the week at 18.47. We wrote last week that the market had become somewhat complacent, particularly in light of the already strong market run since September 2010. We saw that trend reverse somewhat as fears and nervousness rose, particularly in stocks that have had the strongest recent performance. We saw the biggest weekly losses in the High Alpha Momentum stocks, some of which we carry in our own portfolios. In addition, the Russell 2000 fell 4.3% for the week, while the S&P dropped only .8%. We would not be surprised to see a bit of a correction or at least range bound trading over near term. Frankly that would be healthy for the market by helping to establish support levels from which the market can later rally. However, as we mentioned last week, the right approach is to stay fully invested and to ride out any short term fluctuations in what we believe will be another strong year. A market pullback would be an excellent time to buy and load up on quality stocks. Market news last week was mostly positive yet the market still fell, a sign of nervousness, although some notable companies did miss earnings estimates. Next week will bring an onslaught of more earnings reports and the market appears uncertain of where it will go. The better strategy may be to show patience and not make too many moves until after this quarterly earnings season is complete. The next two weeks should be telling for the near term direction of the market. Of course, we would be major buyers if we get an unexpected and major correction. As for trading, we purchased Jabil Circuit from our watch list, a stock that has come under recent selling pressure, but one that we think will recover nicely. We also purchased an opportunistic call spread against Walter Energy, after the energy sector sold off last week. We really like the risk return tradeoff on our WLT position as we purchased the option position for just 47 cents per share, but have the chance to make a whopping $20 per share if the underlying stock can return to previous highs from just a few weeks ago by June of this year. We also closed our short TCK put position for a 95% gain.

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