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Andy’s Market Report – January 30, 2012

Have you seen the VIX lately?

18.53? Seriously?

Well, some of you asked for it and now look what you get in return – low options premium. Sellers of options need volatility, we thrive on volatility. Volatility is our friend.

But volatility is at a six-month low, which raises hopes that a calmer market will bring in more investors. There is certainly no doubt that most risk is tied up in bonds right now, but once investors are willing to take on more risk they will move back into the stock market. The question is when.

“Lower volatility is like a security blanket for retail investors. It allows them to invest for the long term,” said Ben Schwartz, chief market strategist at Lightspeed Financial, the retail broker. “Investors remain nervous about the eurozone crisis, but money is beginning to trickle back.”

Although investment banks and their institutional clients are not convinced that volatility will remain low. Because, low volatility equates to a low-price hedge against a sharp market decline.

“With Vix levels so low, this is a good time for investors to put on hedge positions,” said Pankaj Khandelwal, a senior Vix trader at Barclays Capital. “Even if you have a bullish view on the market, you can buy downside protection for your portfolio at low prices right now,” said Pankaj Khandelwal, a senior Vix trader at Barclays Capital.

And the smart money or commercial hedgers (among the largest traders in the market) have gone net short on Nasdaq, Dow and Russell 2000 futures.

This is telling.

Because when commercial hedgers move net short the market typically witnesses a correction shortly thereafter.

Whether or not we see a decline soon is THE hot question right now.

For the last three weeks it’s been like the movie Groundhog Day. Every day I wake up and market moves higher.

But the bearish indicators are piling up. But the tower of stacked pennies inevitably falls when it does – it typically comes crashing down.

Unless, we have truly entered into a market environment where investors are moving money off the sidelines and into the market then this bull run could continue. But the numbers just aren’t there. Volume is incredibly low and has been throughout the majority of this bull rally.

Has it been a bear trap all along?

Maybe so, maybe not, but one thing IS for certain, with the market at these elevated levels the risk is to the upside. Trade accordingly.

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