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| Subject: Tuesday 13/3/2012=VIX 5-year low,fear gauge lowest level July 2007. | |
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Author: (Tuesday’s low was 13.99, the April 2011 low was 14.30). |
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Date Posted: 09:51:06 03/22/12 Thu VIX Near 5-Year Low – Will This Jinx the Stock Rally? By, Simon Maierhofer Mar 16, 2012 The VIX is trading at a near 5-year low, yet nobody is talking about it. It’s that kind of complacency about complacency that usually gets investors into trouble. The VIX (Chicago Options: ^VIX) or fear gauge is at the lowest level since July 2007. Not only are investors complacent about any possible risk, but the financial media is too complacent to write about investors lack of fear. Lack of publicity of a bearish indictor usually increases the potency of its message. Does this mean the stock rally is about over? There are no absolutes at investing, but low VIX readings have proven to be a good sell signal. Since July 2007 the VIX dropped below 15 only twice – in April 2011 and a few days ago (Tuesday’s low was 13.99, the April low was 14.30). We know that last April’s VIX low led to a swift 20% across the board decline, but to get a larger sample size, let’s relax the parameter to VIX readings below or close to 15. This gives us a few more hits. The chart below plots the S&P 500 against the VIX. The horizontal red line is drawn at the 15 level while the red arrows mark the corresponding S&P level. It doesn’t take a Ph. D. in statistics to decipher the implications of a sub-15 VIX reading. Versatile VIX In addition to its correlation to stocks, the VIX viewed in tandem with the upper or lower Bollinger Band provides actual buy/sell signals (a buy signal for the VIX translates into a sell signal for stocks). A close below the lower Bollinger Band followed by a close above triggers a VIX buy signal (sell signal for stocks). The ETF Profit Strategy Newsletter alerted subscribers of a stock sell signal on January 12, 2010, April 13, 2010 and April 25, 2011. As illustrated by the chart, each such sell signal was followed by a decline ranging from 10 – 30% in the major indexes a la Dow Jones (), S&P (), Nasdaq () and Russell 2000 (Chicago Options: ^RUT). A buy signal for stocks was triggered on October 4, 2011, which was two days after the ETF Profit Strategy Newsletter issued a strong buy-signal and described the ideal scenario for a major market bottom as follows: “The ideal market bottom would see the S&P dip below 1,088 intraday followed by a strong recovery and a close above 1,088.” Short-term Outlook As pointed out by Sunday’s ETF Profit Strategy forecast for the week ahead, seasonal strength before triple witching tends to provide a boost for prices. Once triple witching is over, the seasonal strength gives way to end of quarter rebalancing volatility, which more often than not means lower prices. This doesn’t mean stocks can’t go any higher, but just as a sore throat often leads to a cold, an ultra-low VIX reading can easily lead to a pronounced sell off. In addition to the market’s VIX trouble, Apple seems to be carving out a rare topping pattern seen in gold (NYSEArca: GLD) and silver (NYSEArca: SLV) last year. Apple accounts for 18.44% of the Nasdaq-100, the index that has led the market and is the biggest component of the S&P 500. If Apple catches a cold, the market will get the flu (and perhaps pneumonia). It’s too early for conservative investors to trade based on any of that information (aside from scaling down long positions), but there’s strong evidence that any weakness that pulls stocks below important support will no doubt awaken sellers. The ETF Profit Strategy Newsletter analyzes Apple’s topping patterns and what it will take to confirm that the pattern is playing out. It also provides the must hold support that – once broken – would result in heavy selling and much lower prices. Rating Add Comment2.79 (14) Comments Groodle said on March 22, 2012 How do you say ought oh in Mandarin? http://www.bloomberg.com/news/2012-03-21/chinese-coup-rumors-run-wild-online-then-disappear-adam-minter.html 2 0 -------------------------------------------------------------------------------- Paolo Garbrecht said on March 22, 2012 I'll be wrong, ok, i will pay for that, but i still suggest you do not buy the shallow correction to 1300, i think no number will be too low in the next three years, and our new God Ben the Printer will be part of the problem, not the solution. You have an economy on steroids, the drug is debt and debt affordability through the low, low, historically super low cost of debt. You are buying cars like crazy 'cos you have a new credit bubble there, if your home is worth more than the mortgage on it, you run to the bank to have the money. In Europe we think this is pure crazy, myopic, short term behavior. Thinking that a higher cost of debt (big leg down in treasury prices) will be a positive for stocks, is something i do not understand. Yes, i know the power of money flow, but, 1973/74 SP500 implode 50%, yields up from 6.5 to 8%, treasury down with stocks, the flow is not perfect. You have (same problem in Italy) your beloved Apple, Dell, Nike etc etc, but where do they manufacture? Your economy is not any more the mighty economy of the after WW2, when a NEW Chrysler worker was a happy middle class man, your economy is now based on debt, borrowed money, printed money, and new Chrysler workers? ...slaves? In a debt based economy i think a leg down in treasurys is not so good for the debt loaded consumer, not so good for stocks. Sorry, it is obvious i am now short (from 1350) and i am a victim of the need to feel i am right, i know i may be wrong :))) 3 0 -------------------------------------------------------------------------------- roy said on March 21, 2012 Gold bug, thanks for the pep talk and the endorsement that I am sane :-). In reality, I'm cool. My calling myself insane is just my way of poking fun at my own self. I've been known to poke fun at others and so its important that I am first at a point where nothing anybody else says humiliates me. It is something I've learned from the great spirits ... like Buddha, Jesus of Nazareth and latter generation great ones like Lincoln, Gandhi and Mandela. Thanks for the dialog. I appreciate all the serious talk as I also appreciate the banter. After all, all work and no play makes Jack a dull boy. 2 1 -------------------------------------------------------------------------------- Gold Bug said on March 21, 2012 Roy, in the past I have lost mega-bucks short term trading following fundamentals. It doesn't work. Now most of my money is invested in precious metal stocks, ETFs and physical gold. But I enjoy the buzz of day and swing trading so I dabble with fun money. Following the better economic data out of the US has gone hand-in-hand with this rally. This has resulted in a pick-up in positive public mood from the depths of despair last October. Positive mood means the public want to own stocks. Negative mood creates the desire to sell them. It is the great sweeps in mood that drive markets – and these sweeps, are reflected in Elliott waves. When in a bull market, ‘bad’ news is often considered ‘good’ for the market?! It appears perverse, but can be entirely consistent with the technical picture – and that is what counts. The signals I watch are my tried and true tramlines, Fibonacci and Elliott waves. I also like to look at extremes in trader/investor/advisor sentiment. I rarely look at the ‘fundamentals’. That’s because I have found that getting trade-timing signals off them can be a fool’s errand. You are as sane as everyone else on the board and far more clever. You need to stop beating yourself up. By the way my son who is 31, has been trying the Central Bank experiment since he left home 10 years ago. He is still on his Dad's payroll. 3 1 -------------------------------------------------------------------------------- reader said on March 21, 2012 -29% is fun! 2 0 -------------------------------------------------------------------------------- roy said on March 21, 2012 Gold Bug, Grrrrr!!!. Growl!!! I see that you have raised the Depression flag. Its impressive that anybody can stay a bear in this market and not feel foolish like I do. I feel even more foolish because I was a perma-bull for 20 long years till 2008. In those days, no bad news phased me. For me, Lehman was a water shed event that changed my perspective on everything ... including the meaning of life! But of course it took a lot of reading (and soul searching in the context of all the reading) for me to come to where I am in my point in life. Not to sound religious but I now believe that "the road to heaven is narrow and difficult". Or that "all good things take time". Or that "Sow and so shall you reap". My research also tells me we now live in a world of instant gratification. This is the reason for the layers and layers of debt. We are so beholden to debt, that we use additional loads of debt to try and help us rise to the surface even as the current load of debt is causing us to sink. I'll bet a bottle of wine that nobody on this board will try the Central Bank experiment at home ... as everybody on this board is intelligent. Every intelligent person I have met hunkers down when the going gets rough. Every intelligent person cuts their expenses to the bare minimum when there is not enough money coming in (goes back to the "narrow and difficult road to heaven" wise saying). Yet, we are seeing the central banks do the opposite. Your Great Depression flag sure makes me feel I am not as insane as the market is making me think I am. But then again ... I may really be insane :-). But then again, a good friend and legendary Silicon Valley CEO (whose company brought broadband via telephone lines to the American consumer from the Stanford labs it was developed in) told me a couple of weeks ago "Everybody suffers from some mental illness". And I'm still scratching my head to figure out if he is right. I must admit that on some days, I have started to think he may be right :-). 4 0 -------------------------------------------------------------------------------- Gold Bug said on March 21, 2012 Volatility Research: Wed, March 21, 2012 12:39 PM EDST Our initial forecast, tomorrow, Thu, Mar 22, 2012, VXX close DOWN Sell Silver: Entry 3159 Stop 3219 Objective 3099 Buy SPX: Entry 1414 Stop 1399 Objective 1429 Buy Nasdaq: Entry 2757 Stop 2727 Objective 2787 Not for widows or orphans. 2 0 -------------------------------------------------------------------------------- Gold Bug said on March 21, 2012 TM if I were you I would hurry down to the liquor store (off license to us Limeys)and get me a nice 40oz of Jack Daniels. JD on ice is exquisite! I found this recent item, which should be something for the bulls to chew over: New data from the US Commerce Department show employee pay is down to the smallest share of the economy since the government began collecting wage and salary data in 1929. Meanwhile, corporate profits now constitute the largest share of the economy since 1929. With real wages still trending down, can the US economy grow, since 70% of US GDP depends on personal consumption, and consumers still have huge debt levels? And can corporate profits – which are supporting share prices – continue to grow as they have in the past three years, companies having squeezed costs to the bone since the credit crunch? Is mention of 1929 – and we know the aftermath – an omen? As I said… something for the bulls to ponder! 2 0 -------------------------------------------------------------------------------- Jay said on March 21, 2012 Roy, getting back to you on an earlier post: you have great recall. I sold half my UVXY at a small loss and hold the rest in it's current demise. Worst single trade I have ever made. There are multiple notes to self: 1. It is OK to admit you are wrong 2. Stop loses are not just for pansies 3. If this s--- was easy everyone would do it 4. Quit swinging for the fence, Babe Ruth boy Fortunately UVXY is a small fraction of my holdings. But the lessons will endure. -jay 1 0 -------------------------------------------------------------------------------- roy said on March 21, 2012 TM, I've heard the election year argument before. 2008 was an election year too. And the stock market unraveled big time in that year. Election year rallies could have been the old normal, but like the legendary Bill Gross of Pimco recently said, we are living in a "new normal". I could be wrong but the election year argument does not impress me. So the next argument for a rally is the liquidity infusion. This argument is strong. The evidence from the last 3 years proves that the one market that money printing has a direct impact on is the equities market. But the last 3 years have also proven the "alcohol effect on a drunkard" case. Each time the money printing stopped, the market crashed. And this observation is no longer a secret. It is almost as if the "money printing effect" genie is out of the bottle. As Paulo rightly pointed out, money printing has not addressed the solvency issue that is now affecting most of the First World. And the one immediate negative effect of money printing - "rising inflation" is already visible in the form of high gas prices and higher food costs. Money printing has never worked in recorded history and the history of economics will be turned on its head if it works this time. So ... in fair measure, I'll give you that the stock markets will go up some more but much like it did in the last 2 years, there will be MAJOR corrections to reflect reality when the money infusion stops. My final point is about the 2%-3% corrections. As long as everybody knows that the market is being driven by free money printed by the central banks, I do not understand why it is we need the minor corrections. Perhaps, this is the exact reason every market timer has been wrong since the start of February. I'm now thinking the markets will trudge along for as long as the printing continues. The investment banks are getting the money for free and they not even have to pay it back ... so why not gamble your way to hell? The markets will correct HUGE with a domino effect much like Lehman, when the printing stops. The printing cannot go on forever - of this I am sure of. As I have previously indicated, money printing is equivalent to transferring wealth from the poor and the middle class to the rich. The poor and the middle class did not gain from the rise in the stock market the last 2 years. At some point, this strategy creates imbalances which then manifests in unhealthy ways. This is the ONE reason the Germans are not very big on money printing. They remember the massive negative effects of their money printing experiment from the Wiemar Republic ... and I believe they are right about this. Time will tell. I'd like to hear your thoughts if you have precise counter arguments to the above 3. I give you major credit for your philosophy that you may not be investing in the fundamental arguments and that you just follow the money. If you are able to do it in a smart manner (avoid the slaughter when it happens) then clearly you will always be a winner. [ Next Thread | Previous Thread | Next Message | Previous Message ] |