The Chicago Board Options Exchange (CBOE) says that their widely followed volatility index (^VIX) had two consecutive record volume days Tuesday and Wednesday of this week. That shouldn’t be too surprising given the swings on the major indices, but that doesn’t mean the volatility comes from a rational place. At least according to Mark Sebastian of Option Pit.
“The market is selling off partially rationally and partially really irrational,” he told Yahoo Finance from the CBOE trading floor. Sebastian says concerns in Europe and turmoil in Hong Kong make sense to sell on. Ebola, however, he thinks is “completely irrational.”
Regardless of anyone’s opinion, stocks are selling into correction territory and for the smart investor, there’s not much to do but sit back and watch. So what should we be watching for?
“We saw a huge amount of programmed buying when the market touched on down 10% yesterday,” Sebastian notes. “I think we have to test that level again….We’ll probably test below 1800. At that point, the S&P 500 starts to look really oversold and an interesting purchase at that point.”
He says as that index sinks to that key level the VIX, which topped out at 31 yesterday amid the crazy down and then “less down” trading session, could head towards 35 as the sell-off continues (still below 2011 levels that saw it surge above 40).
Besides that key 1800 buying opportunity Sebastian says to keep an eye on the Fed and their interest rate saga.
“If you look at where the 10-year note (^TNX) is trading,” he says, “it’s testing that 2% level. The idea that the Fed’s gonna raise rates in 2015 now appears to be ludicrous according to all the smart money. Watch for Fed language that could be an absolute catalyst for an explosion higher.”
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