Bond ETF’s (IEF and TLT) are both making all-time highs (in price). Stock volume patterns are very strong. This is the point that all the stock market bulls (especially on CNBC) seem to miss: yes, government bonds are yielding small interest rates, but if you own them, they are rising in price as the yield falls. In the last year, IEF (the Barclays 7 year - 10 year bond ETF) is up 15% in price, and TLT (the 20-year bond ETF) is up 35%!!! So what if they only yield 1.6% and 2.7%, respectively?
Despite a rather severe oversold condition, there have been no actual confirmed buy signals issued yet. This oversold condition has persisted for the past couple of weeks, spurring modest rallies, but all that seems to have done is to ease the oversold condition a bit and make way for the next wave of selling, such as we saw today.
As often happens on the first day of trading after a three-day weekend, the market is buffeted by cross-current, so there are several moves. Initially, the market was strong yesterday, topping out almost exactly at $SPX 1335. Then selling drove the index down about 16 points, before a late rally took it back to near the highs. Even though intraday volatility increased, actual (realized) volatility has not. Tonight, S&P futures were down about 14 points after more negative news out of Europe.
The massive oversold condition that existed at the end of last week has spurred a rally this week. when the market is as oversold as it got last week, it usually rallies back slightly beyond its 20-day moving average. That moving average is currently at 1350.
The equity-only put-call ratios remain on sell signals.
Breadth has been slightly positive this week, but the breadth indicators continue to remain on sell signals and are still in oversold territory.
MORRISTOWN, N.J. (MarketWatch) — One thing that all traders figure out sooner or later is that an oversold market can continue to decline — sometimes at an ever-increasing pace. Eventually, of course, traders are “sold out,” and the market rallies. But even though such an oversold rally might be swift and of considerable size, it is often short-lived.
The decline in $SPX this month has been swift, but surprisingly orderly. For example, the 20-day historical volatility of SPX is only 14%, which is extremely low after a decline of the magnitude that we have recently seen.
See the Market Insight column for further information on the large discrepancy between implied and actual volatility.
On May 23rd, the CBOE will be listing futures on the Nasdaq-100 Volatility Index with the symbol /VN. The Nasdaq VIX futures will be similar to the regular S&P $VIX futures in that they will be "based on the real-time prices of options on the Nasdaq-100 Index," will have a multiplier of $1,000, will trade from 8:30 am - 3:15 pm Chicago Time, and have the same settlement date as the /VX futures ("The Wednesday that is 30 days prior to the third Friday of the calendar month immediately following the month in which the contract expires ").
Is this current market decline the harbinger of a new bearish market phase, or just a pause in the general bull market that was launched in March, 2009, with a couple of healthy bumps along the way? One answer to that question can be observed in the behavior of the $VIX futures. The stock market’s decline in the past two weeks has caused the $VIX derivatives to lose some of the bullishness that they have been displaying since last November. Not only have the futures lost premium, but the term structure has begun to flatten as well.
The $SPX chart has turned bearish, with the breaking of the 1340 support level. However, it is oversold in that it is more than 4 standard deviations below its 20-day moving average, which is currently at about 1370.
Equity-only put-call ratios remain on sell signals, but they are so high on their charts that they are in an oversold state, too.
The breadth indicators have now reached extremely oversold levels, but they are also on sell signals.
The stock market has broken down through several support areas, to the point where it is now below the important support at 1,340 on the Standard & Poors 500 Index. This has turned the overall picture negative, but it has also created some extreme oversold conditions.
It is common knowledge that a bear market can continue to decline, even while oversold conditions exist. However, they eventually give rise to very sharp, but generally short-term rallies.