As I suspected last weekend, the market was poised to move to new highs. The S&P 500 Index (SPX) is there this morning. One of the charts we’ve been following is VIX vs. VXV. It has been below .9 most of the week and looks like it’ll give an official all clear signal tomorrow. I’ll do a full update of our core indicators tomorrow and highlight other general market indicators over the weekend.
Last week I mentioned that the nature of the bounce would tell us if we’re headed to new highs or seeing a failed rally. As of this week we’re on track to see new highs…if Russia and Ukraine will just cooperate. The underlying indicators I watch are improving enough to support a move to new highs, but the fear of a larger war in Ukraine is putting a drag on the bounce. As a result, risk is the most important indicator to watch at the moment. Even with world tension our market risk indicator backed away from a warning last week. Now only one of its four components is warning (and it has turned back up). Our core measures of risk continue to signal all clear. Fear of risk is moving the right direction and should support the market in the absence of bad news. The ratio between VIX and VXV improved last week, but still couldn’t get back below .9 to signal the rally should continue. It was below
I’m starting to see some positive signs that the dip is behind us. First is Elder Impulse for the S&P 500 Index (SPX). It has a tiny blue bar for the week. If it can hold or move to green by Friday it will be a very good sign. Next is the ratio between VIX and VXV. If fell below .9 today. It needs to hold below that level for the rest of the week to signal the worst is behind us. The next two hurdles to cross are from price on SPX. The 50 day exponential moving average is where the market closed today and the 50 day simple moving average is near 1955. In addition, the most tweeted levels for the market are near the 1955 area. If those two levels are surpassed then the odds will favor an advance to the all time highs.
It’s looking like the market is ready for a bounce. The nature of any bounce will tell us whether we should expect new highs or if the rally will fail. Here are some of the critical charts I’ll be watching over the next week or two. A chart I show often when the market is starting a move lower is the ratio between near term volatility (VIX) and mid term volatility (VXV). Spikes in this ratio show immediate fear is greater than longer term fear. They are usually associated with an event or a sudden recognition of danger by many market participants. When the market bounces out of a short term low this ratio can help us determine if near term fear is subsiding or lingering. Over the next few weeks we want to see it fall below .9 to give the all clear signal. If it can’t move below that level the odds favor more downside ahead. This indicator couldn’t clear the warning two weeks ago and signaled that
The trend that started two or three weeks ago where our core indicators moved up and ancillary indicators fell continues again this week. Below are updates to some of the things I’m watching without much commentary. You can view this post for an explanation. I use the ratio between VIX and VXV to signal “all clear” when it falls back below .9 after a choppy of falling market. It couldn’t quite get there this week. Large caps are still outperforming small caps…rotation to safety starting? Junk bonds (JNK) are still under performing high quality bonds (LQD)…risk off. The individual stocks I’ve been watching for clues to a direction are starting to diverge. Market participants are becoming more selective in the momentum names which caused a decline early in the year. Here are some examples. Twitter (TWTR) is still in a holding pattern and hasn’t decided which way it wants to go. Baidu (BIDU) is breaking higher. 3D Systems (DDD) looks like it’s breaking down.
Over the past week we got more of the same from the indicators I follow. The market chopped around and our indicators had a slight decline. Market participant appear to be chasing price and being whipsawed by choppiness. This action is showing up in market internals. An example is the ratio between near term volatility (VIX) and mid term volatility (VXV). On a daily chart it moved above 1.0 signalling caution right at the low of the last dip. Then when it moved back below .9 (usually signalling “all clear”) the market lost momentum and looks to be rolling over again. The weekly chart of VIX vs. VXV shows two caution signals (above 1.0) since the first of the year that occurred on small dips in price. In addition, both VIX and VXV are making lows above all of the 2013 lows. This indicates not only increased caution by market participants, but a bit of skittishness. It is reacting much the same as measures of breadth that I’ve mentioned since
By almost all the measures I track it’s make or break time for the market. I’m seeing a pattern in both core and ancillary indicators that has often marked lows in the market over the past few years. Each time our indicators were close to signalling an extreme warning the market promptly turned back up and resumed the rally out of the 2009 lows. Over the longer term when our indicators have reached these levels the market rallied 35% of the time and had an extended decline or choppy period 65% of the time. As you know, I can’t see the future so all we do is go with the odds. As a result, our core portfolios raised cash and/or added a hedge yesterday. Here are some highlights of things I’m seeing that makes me cautious. The ratio between near term volatility (VIX) and 3-Month volatility (VXV) is currently rising as a result of both VIX and VXV moving up. This is a condition that has only occurred a few
Over the past week as the market declined sharply our core market health indicators followed suit. The damage was enough to raise some cash and/or add a small hedge in the core portfolios. The action on Friday should be disconcerting for the bulls since the S&P 500 Index (SPX) sliced straight through the 50 day moving average, paused at a Twitter support level (1800) for only a few hours before slicing through it. Although some damage was done, both in terms of price and internals, the outlook isn’t as bleak as it may seem…yet. When I look at all of the indicators that I follow I get the image of a battle joined, not won. The bears have reasserted themselves, the skittish bulls have run from the field, but there is a shield wall of committed bulls still standing firm. This puts us in a position where the best we can do is wait to see the outcome of the battle. The most important thing to watch over the coming
I’m seeing several indicators confirm the recent break to new highs on the S&P 500 Index (SPX). First is our core market health indicators that had us removing hedges and adding longs during the last dip. The core indicators strengthened or held up as the market consolidated which gave indications that market participants were positioning for a fourth quarter rally. That strength was the first indication that the consolidation was most likely over. The next signal came from our Twitter Sentiment indicator for SPX on 9/10/13 when it cleared its consolidation warning. It did so by breaking the downtrend line that was confirming the consolidation. Yesterday Dow Theory reconfirmed the bullish trend. Then today a ratio that I use on a weekly basis looks like it has given the all clear signal. Historically, when the ratio between VIX and VXV (one month volatility vs. three month volatility) falls back below .9 on a weekly basis it has been the beginning of a new uptrend. When this ratio is high it
Sentiment generated from the Twitter stream for the S&P 500 Index (SPX) closed above its recent down trend line today. That has cleared the consolidation warning issued August 14th. Smoothed sentiment had a positive divergence with price ahead of the break of the trend line which increases the likelihood that the uptrend in the market will now continue and go on to new highs. This isn’t an all out buy signal (used for making a trade). This is because the positive divergence didn’t last for at least three weeks. The result is that this is a slightly weaker signal because the shorter duration didn’t give as much time to shake out weak hands. I’ve drawn a new uptrend line under smoothed sentiment, but it will most likely need to be adjusted to the next dip so we’re following a trend at least three weeks in length. I wouldn’t be surprised to see a small consolidation at this level (near 1680). It has been a target area for many traders on