The rally off the March lows is starting to seem like a hot air balloon that has sprung a leak and is getting ready to collapse in on itself.  For today’s rally to be believable, we’d need to see a lot more volume than this. NYSE volume made a new low for the year, and the lack of significant news today suggests this is likely some short-covering rather than a genuine bullish vindication.

The ratio of front-month to 3-month volatility is stretched now further than it’s been all year, and in fact is giving the strongest sell signal that we’ve seen since the top back on Dec 24, 2007. We all know what happened after that.

But never you mind: the permabulls and correlation-causation know-nothings in the financial press can’t keep from dancing. On days like this The Correlation Game becomes irresistible, so let’s play.

The Associated Press purrs:

Stocks up as oil price drop eases inflation fears – Wall Street rallied Monday as oil prices fell back and alleviated some of investors’ concerns about accelerating inflation. [link]

They forgot to include, however, the interview with the fund managers who all must’ve been thinking, “Oh, thank heavens, oil only costs $124/barrel now, so surely we’re out of the woods and inflation is going to ease! Buybuybuy!!” Obviously, blips in the price of oil did not cause today’s rally. And why fixate on oil? Why not spin some yarn about how the tragic earthquake in China will give Chinese industry some difficulties and make US companies more competitive? That nonsense is just as plausible as the oil story!

Be sure to check out the EEM double calendar that Frank posted earlier today. He’s giving these trades away for free and will follow through on at least one roll before Calendar Options launches.

Reversal Readings

Not much to report here tonight – most of the oversold readings we saw last night were alleviated today, but the rally wasn’t monstrous enough to generate too much overbought pressure either. Of the big volatility indexes, the RVX (Russell 2000) has held up the best in nominal terms, but that’s not necessarily meaningful.

QQQQ – 90.51
IWM – 93.01
EWZ – Brazil – 95.58
EWA – Australia – 96.01
XLU – Utilities – 94.64
PHO – Water – 97.45
ILF – Latin America – 92.11

Last 5 posts by Condor Options

• Midweek Sméagol Reading - August 20th, 2008
• More on The Correlation Game - August 18th, 2008
• August Monthly Review - August 17th, 2008
• They Have the Passports to Prove It - August 13th, 2008
• Sleepy Nasdaq - August 12th, 2008