The bears have had many chances this month to do some serious damage to the market but they haven’t been able to. Perhaps they are waiting for the “sell in May and go away” crowd to join them next month, but perhaps they just don’t have the firepower to drive the market down. Whatever it is, the indicators and the bulls are on the brink of pushing this market higher again.
The market gapped higher on what has become 'typical' Apple earnings euphoria. Durable goods orders came in below expectations. Meanwhile, the Fed has notified us interest rates will remain at their very low levels. Follow through after the open was short-lived, which was to be expected on a Fed day. What should also be expected is violent unpredictable swings throughout the rest of the day. Thus, we need to focus only on the recent major levels of support and resistance, roughly $SPX 1390 above and, for now, 1358 below.
The Standard & Poors 500 ($SPX) chart (Figure 1) still shows heavy resistance at 1390. That level has been challenged on five of the last six trading days. So far it has held, thus making it a very strong resistance area.
Equity-only put-call ratios remain on sell signals, which originated a week ago. These ratios are now climbing their charts swiftly, solidifying those previous sell signals.
One should be aware of a potential problem in these ETN’s. I am not referring to the “net asset value” problem that engulfed the “Double VIX” (TVIX) a couple of weeks ago. Rather, I am referring to the fact that an ETN is a credit obligation of the issuer (Barclays, in the case of VXX, VQT, and many others). An ETF, on the other hand, is collateralized by placing underlying securities on deposit.
Volatility has returned with a vengeance. The bulls are very excited about the rally of the last two days. Perhaps they are correct in their euphoria, but we don't yet see it in the technical evidence. The violation of the 1390 support level this week turned the $SPX chart negative. something quite serious, but it if holds, that would be bullish.
When the market broke down on Monday through the 1390 support level, several other technical indicators turned bearish as well. First and foremost were the equity-only put-call ratios.
In the last issue, we mentioned, on page 8, that the Composite Implied Volatility (CIV) indicator was on “sell alert.” Then in last week's Hotline update, we verified that a CIV sell signal had indeed occurred. It has proven to be a timely signal. This is an indicator that not many people are familiar with, so we will review the definitions and data that comprise the indicator.
After some minor selling last week, the Unemployment Report was used as an excuse for some heavy selling on Monday. Since the report came out when the market was closed (what poor methodology!), the stock market had the whole weekend to worry about things.
In this morning’s comment (in the Volatility Report), it was shown that several of the other indicators had turned negative as of yesterday’s close. That foreshadowed the selling we’re seeing today – the most negative day since last November (at least at this point). The heavy selling today has seen $SPX slice right through the supposed support at 1370, creating the very real possibility of another test of the 1340 area.
The stock market has run into a little trouble this week. Things started out well enough, with a strong rally on Monday taking $SPX to new post-2008 highs. However, selling has commenced since then, fueled by several factors: an overbought condition, more poor news out of Europe (concerning Spain), the FOMC minutes which were released on Tuesday and appeared to indicate that the Fed is not planning on any quantitative easing in the near future, and now the Unemployment Report.