A Market Timing Report based on the 10-16-2015 Close, published Sunday Oct. 18th, 2015
UPDATE 10-19-2015: The Market Has Healed Substantially In Volatility Terms: Invest Accordingly
This was too important not to share quickly. But first, here’s a very relevant secret that is likely worth billions of dollars: “No matter what the tricksters do, cannot hide three things – price, volume, and volatility.”
For today, I’ll focus on volatility known as the VIX which is a measure of how frightened investors are to invest in the SP500 Index (you can search it and find the mathematical definition). Here’s the gist of my insight today: After a volatility spike above 50, which was even higher than that seen in 2010 and 2011, this market has healed faster than after the Flash Crash of 2010, which was more or less a deep correction and far faster than following the 2011 pullback.
In other words, healing of the market that normally takes months after a fear spike this huge, took far less time after the recent August 24th, 2015 Flash Crash than in 2010 or 2011. We don’t even have to get into the 2008 comparisons they are so far off. The VIX is not back below the 13.73 level it took off from, so it will be further confirmation should we drop back below that level and head to 12 and change.
My conclusion? The fact that this market has healed so fast in face of a Fed rate hike is remarkable and you need to invest accordingly. This is not 2008 until proven otherwise by a much more impressive volatility pattern. Can I guarantee that won’t happen? Of course not! We are not babies around here who insist on things staying the same. We shift our opinions when the market shows its colors.
Meanwhile, my opinion that this was a 2011 redo has not changed since I hinted at that in early August. In the meantime, the media has caught on to this idea and you’ve heard it elsewhere by now.
The August 2015 Flash Crash has turned out to be more benign thus far than either the deep 2011 correction or the 2010 Flash Crash correction. The first legs of those two corrections were of similar magnitude. The 2nd leg of 2011 was a bit deeper at -21.6% (a “Bear market” which shows you the value of those ridiculous definitions – because the market rallied strongly from that low!) and -17.1% in the 2010 Flash Crash (from tops to bottoms). The damage this time? “Only” 12.5%, a healthy correction.
This does not mean that the next market decline will be as benign as this one has been. A VIX spike above 20 will be the first warning sign that we’re going to correct again at least as severely if not to the degree seen in 2011 (more than a 20% pullback). What the “VIX healing” means is that to sit around worrying when the market has been behaving well is plain silly and is likely to cause an investor to sell when s/he should buy. We remain ahead of the market with our recent buys. Let’s be vigilant and “present” as we observe the markets.
How do you “stay present” as you invest? Read this: A Primer On Fear and Greed
And now back to our regularly scheduled programming….. ;)
I deliver focused comments on the markets. These are supplemented with “Tweets/StockTwits” (see links below).
1. SP500 Index: I believe the market will continue higher to reach the 2044 level, where the market broke down in the first place. That has been my target for some time. Once a market has broken down and rebounds, it commonly bounces to the 50% retracement level of the prior fall, but it may also go to the 61.8% Fibonacci level. Of course, these levels are only approximate targets, and the market is more likely to pay attention to previous support and resistance levels, such as the 2044 level. That is our next upside target.
The economic data including both retail sales and the producer price index (PPI) told investors that sales and pricing were both weak. This hurts corporate profits on two fronts. Deflation pushes pricing down, and consumers will commonly wait for even lower prices before they will buy if those forces are strong enough.
In the meantime, the large caps (SP500) went up while the small and midcaps lagged in the prior week as shown below the SP500 chart (the main index charted is biotech (IBB), but you can see how the SP500 has pulled above both the small cap (IWM) and midcap (IJH) lines.
SP500 Index (SPX SPY; click to enlarge):
2044 is the next upside target.
Biotech lags both the SP500 as well as the mid and small caps
The lack of recovery of biotech might be an ominous sign for the rest of the market as it was a market leader, but there is a catch. A big part of the under-performance is drug pricing pressure, due in part to Secretary Clinton’s comments on outrageously high drug prices. I saw this coming and reported on it earlier this past summer. Investors did not like hearing it, but being aware of what is going on is preferable to playing dumb.
You can expect drug and biotech companies to suffer for much longer and perhaps the rest of the market can continue higher without them. The gains in those two sectors have been phenomenal since the Affordable Care Act became a certainty.
One reason the market can go higher is that AAII.com investor sentiment showed slightly more Bearishness with Bulls dropping about 3.5% and Bears dropping only about 1% as the market rallied. Investors typically get overly excited at tops and are not worried, so this market has the proverbial wall of worry to climb (meaning the worry is Bullish for the market). Remember that sentiment is only one factor and major earnings successes or disappointments in the next batch to come this week may decide how high this rally takes us. My sense is we’ll hit 2044 at least before the next downturn. Earnings have not been bad enough so far to send the market back down.
Keep up to date at Twitter and StockTwits: See my messages on Twitter® Follow Me on Twitter®. Follow Me on StockTwits®).
2. Small caps are now lagging the SP500 Index. This is called bad breadth and indicates a weak overall market. The small caps are still below the Sept. high. Part of this may be investors wanting to play a rally back up, but without holding the higher beta small cap stocks in case of a pullback. Particularly when volatility skyrockets, as it did at the end of August, investors try to avoid high beta stocks.
Russell 2000 U.S. Small Cap Index (RUT, IWM; click to enlarge):
Small caps lag large caps.
3. Gold:
Gold ETF (GLD): Gold made it through the orange triangle shown, but was held up by the yellow down trend line, which is a longer term trend line. The fall occurred when the US dollar turned back up from support as shown in the TOP CHART of: This Update (Click!).
Gold hit a longer term down trend line and fell as dollar strengthens.
4. 10 Year Treasury Note Yield: Yields fell again due to very weak US retail sales, and the perceived lower likelihood of a near term Fed rate hike.
U.S. 10 Year Treasury Note Yield (TNX,TYX,TLT,TBF):
Rates continue down in range.
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