Just when many in the media were busy writing off the VIX and computing reasons why it was so low (see our past post on the VIX II), it seems to have regained its validity, jumping from a low of 15 and change to over 41 today, showing that fear does come into markets and it still should be used as a measurement of complaceny and/or panic states.
Interestingly, the SEC & our politicians keep trying to find reasons that the Dow fell almost 1000 points and they are coming up empty. Except that the most recent explanation was that a US mutual fund company was a huge seller, but since they are a bona-fide hedge, size doesn’t matter. What??? A mutual fund company moving the market that much in futures. We don’t buy it.
Could it be that there was actually some selling? When someone comes out and sells 500000 e-mini S&P contracts electronically in one trade – that’s going to move the market. To put it into perspective, a 100000 sale would probably move the market 10 points. Also, the daily volume was staying around 1.2 Million for the month. Somebody wanted out, or to get short! With the market being as overbought as it was, it really isn’t too surprising that we had a sell off like that. In our opinion, what happened goes likes this – The market starts to sell off, which by the way, the High Frequency Trading programs can be turned to sell. The premium between the cash market (read stocks) and the futures gets to a certain level with the market being down 4% or so, and the Algorithmic computer trading programs kick in selling. Then Sell Stops get hit below the market, that where there to protect the longs. In all the madness, there were no bids or buyers and the thing dropped like a stone. Only when the S&P futures locked limit down – the futures are not allowed to go down anymore – did JP Morgan came into the pit and become a big buyer.
Today we have more fear, coming from Europe. The Greeks possibly rejecting the EU/IMF (which includes the US money, since we are 20% of the IMF funding) bailout of Greece. Seems they don’t like the idea of working longer for retirement and paying taxes. Germany is trying to stop the selling by banning naked short sales and the European markets go down over 2%. That’s a surprise! So now folks are wondering if the European Union and the Euro currency will survive.
Treasuries have become the vehicle of choice as the flight to quality ensues. We think that they are really overbought currently, based on this panic and nervousness. The S&P has had some serious selling this week & we suspect that we may be getting close to a short term bottom, although we are certainly not bullish. There have been many climactic selling episodes this week, and eventually the sellers run low on ammunition.
In the UK, the government has been totally turned over and it looks like they have come to realize that they have got to figure out a way to pay for this debt they owe. So they propose a 50% tax on capital gains, from 18%. That is not a typo. This is not being received well, but it does bring up the white elephant in the room that no one is talking about. How in the world are all these countries going to pay back this massive debt? Unfortunately, some won’t. We do not think that you can bailout countries that can not service their debt, by giving them more money/debt/bailouts. This is not logical.
Thursday, May 20, 2010
Monday, May 3, 2010
What’s driving this stock market?
Is it really consumer confidence, real estate recovering, or GDP increasing? Whatever the reason, one thing is certain; we have some very determined bulls buying every dip. The beginning of the month usually has new money to invest from retirement plan inflows and the like. On days like Monday, when the market goes up for 3.5 hours with little drop, we see computer driven buy programs pushing things up, short sellers coming in, getting frustrated and covering their positions, followed by stop outs on shorts, pushing things even higher. Therefore, we get days where the volume can be lower, but the market goes up. This has been a recurring pattern for months. Of course, good economic news makes everyone more optimistic & that helps things too, usually. But lately, it really hasn’t mattered if the news was good or bad, the market still went up, until last week.
Bad news actually produced some selling & volatility in the equity markets. The credit quality downgrades of the European countries bonds – Spain and Portugal, along with the Greek debt being untradeable and the bailout still in the works shows how vulnerable our markets could be. When the news hit, the S&P futures dropped 10 points in less than 2 minutes. It was fast! The Treasury market seems to be the one between stocks and bonds that is acting with more normalcies. The T-bonds have been the recipient of some asset allocation, as buyers have come in pushing them into the overbought territory, most likely on fear actually setting into some people. They could also be getting a lift from the international buyers moving money out of foreign bonds looking for a safe harbor.
The market has been trading in a range again, with the lows on the e-mini S&P of 1080 providing support and 1210 resistance. What is interesting is that unlike other times in the last 6 months when this setup has appeared, usually there has been a one or two day pullback and then back to the slow grind up. This time the S&P closed below 1192, the 21 day moving average 3 out of the last 5 days, which will move professional investors more bearish. Also, the range on the market has really widened along with the volume, creating sloppy or loose patterns, far different from a one day pullback followed by the steady grind up.
As we have discussed before, the market has been acting in an atypical fashion. At the beginning of last week: our proprietary indicator tracking block buying and selling & the length of time this goes on is at the highest level since the March 2000 market top, which was a historical high for the last 33 years of tracking and March 1998. As oversold as we were in March 2009, our indicator shows we are about 1.42 times that much overbought now. CBOE Equity Put to Call ratios are at the lowest level since the July 1999 top and Historic March 2000 top. Investment Advisor bearish sentiment is at the lowest reading since 1987. Our studies have never had a market this overbought that has not had at least a 20% correction. We are very concerned about this situation and are not comforted by the low volatility.
Additionally, the market has had 80% of the days categorized by us as a confirmed range day, or the type of market day that lacks directional conviction one way or the other. In a normal environment the distribution of these days is closer to 35-40%. Never the less, almost all of these days print positive closes.
We have seen markets that have been pushed by large buy & sell programs that go on for a few days or even weeks before, but nothing close to this magnitude. Some signs that things are starting to return to normal, are that the market was up initially on Apple's good earnings, then pulled back 2 weeks ago - due to the heaviness. Additionally, last week we witnessed rallies that take a breather and declines that get excessive, and then bounce
Bad news actually produced some selling & volatility in the equity markets. The credit quality downgrades of the European countries bonds – Spain and Portugal, along with the Greek debt being untradeable and the bailout still in the works shows how vulnerable our markets could be. When the news hit, the S&P futures dropped 10 points in less than 2 minutes. It was fast! The Treasury market seems to be the one between stocks and bonds that is acting with more normalcies. The T-bonds have been the recipient of some asset allocation, as buyers have come in pushing them into the overbought territory, most likely on fear actually setting into some people. They could also be getting a lift from the international buyers moving money out of foreign bonds looking for a safe harbor.
The market has been trading in a range again, with the lows on the e-mini S&P of 1080 providing support and 1210 resistance. What is interesting is that unlike other times in the last 6 months when this setup has appeared, usually there has been a one or two day pullback and then back to the slow grind up. This time the S&P closed below 1192, the 21 day moving average 3 out of the last 5 days, which will move professional investors more bearish. Also, the range on the market has really widened along with the volume, creating sloppy or loose patterns, far different from a one day pullback followed by the steady grind up.
As we have discussed before, the market has been acting in an atypical fashion. At the beginning of last week: our proprietary indicator tracking block buying and selling & the length of time this goes on is at the highest level since the March 2000 market top, which was a historical high for the last 33 years of tracking and March 1998. As oversold as we were in March 2009, our indicator shows we are about 1.42 times that much overbought now. CBOE Equity Put to Call ratios are at the lowest level since the July 1999 top and Historic March 2000 top. Investment Advisor bearish sentiment is at the lowest reading since 1987. Our studies have never had a market this overbought that has not had at least a 20% correction. We are very concerned about this situation and are not comforted by the low volatility.
Additionally, the market has had 80% of the days categorized by us as a confirmed range day, or the type of market day that lacks directional conviction one way or the other. In a normal environment the distribution of these days is closer to 35-40%. Never the less, almost all of these days print positive closes.
We have seen markets that have been pushed by large buy & sell programs that go on for a few days or even weeks before, but nothing close to this magnitude. Some signs that things are starting to return to normal, are that the market was up initially on Apple's good earnings, then pulled back 2 weeks ago - due to the heaviness. Additionally, last week we witnessed rallies that take a breather and declines that get excessive, and then bounce
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