Tag Archives: VIX

The tables are turning, and panic is on the way back.

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I was extremely, almost uncomfortably short for the last couple of weeks, and with the Dow down 175 a few minutes ago, I covered my stock futures shorts and bought a few contracts to hedge up my long-term puts. It’s looking very good for the shorts — dollar up across the board, bond spreads wider, and stocks and commodities down together. Classic deflation trade.

Here’s the Dow. You can see that RSI says we’re already into oversold territory on the daily bar, which indicates the power of this move. There could be a bounce here, but I think stocks are where gold was after it fell hard from $1228 last month: they can rally, but the high is in. Now the bulls will be the ones fighting the tape.

Source: Prophet.net

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Of course, the rally taught us bears to go easy and hedge up after little sell-offs like this, but that is going to be a frustrating stragegy if we’ve turned. As with the euro since the dollar index put in its low, surprises will be to the downside. I suspect not even this initial move down is over yet, maybe just the most violent part.

Take a look at the VIX. It has just blasted off – jumping over 50% in a week, most of it in just two days! This is giving us a very, very strong signal that panic is coming back, and in fact, was never very far off:

Just when nobody is watching, stocks look done.

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Here’s a 10-day shot of the Dow — see the broken trendline and failed retest, and note that ramps in DSI only result in weak price moves:

Source: prophet.net (still loving their charts)

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The 5-day equity put call ratio is giving a louder sell signal than a few days ago:

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The VIX has been bleeding downward momentum and flattening out, much like the dollar this autumn before it started its violent reversal:

Source: yahoo! finance

Here’s the dollar vs. the euro:

Source: yahoo! finance

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I am now short stock indexes and calls, long VIX futures and long puts. It appears highly unlikely that stocks press much further here, and there is a risk of an abrupt decline in the coming weeks — all it would take is the slightest scare to trigger a stampede.

Fear is on vacation

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A low and choppy equity put:call ratio on a high and choppy market remind me of the second quarter of 2007, the Goldilocks era. The 5-day average CPCE is my favorite short-term fear gauge, since it is so mean-reverting and highly predictive of stock action on a month-to-month basis.

Source: indexindicators.com

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And here’s a 5-year shot of the VIX (the most popular fear gauge). Sure looks due for a spike:

Source: Interactive Brokers

Shorting the Nasdaq and Russell 2000

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Both are overbought on flagging momentum. Note the high and downsloping RSI (Relative Strength Index) since yesterday:

Source: Prophet.net

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I’ve been playing around with Tim Knight’s creation, Prophet Charts, and I have to hand it to him — this is the best assembly of technical analysis tools that I’ve seen.  Stockcharts.com is still pretty good for a free service, though (I haven’t tried their subscription tools).

Also of note today is that the VIX has broken 20. Options are cheaper than at any point since the Summer of ’08. The lofty equity valuations, flagging momentum and sense of complacency remind me of the Goldilocks winter and spring of ’07, when prices drifted upward slowly in a narrow channel before suddenly cracking, first with a 400 pt decline in the Dow on one late February day, then with the seizing of the credit markets in late July.

We’re probably at another top; the question is what kind

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I’m again very bearish short-term, basically taking the approach that we’re topping until proven otherwise. I think we’re about to roll over like we have three times since early August. Indicators show that each recovery since then has further disheartened the bears and encouraged the bulls, which is as it should be, making each top more likely the final top. It’s a process: the market shakes out as many players as possible, so that the fewest number of bulls and bears benefit.

I’ll start as I often do, with the equity put/call (10-day average) vs. SP500:

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Take a look at the similarity between the CPC and price action from January to July ’07 and that of May ’09 to today, and note the last time the 10-day average dipped below 0.55: July ’07.

The VIX is also indicating complacency, with its RSI well into “oversold” territory:

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I’m also noting the relative weakness of the Russell 2000 and Nikkei in this latest push upwards. The Russell has only recovered back to its September highs, lagging the SPX and NDX, and the Nikkei remains well below its August levels (as does Shanghai, which topped in early August):

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Multiple signs are pointing to an equity sell-off dead ahead (starting this week or next), probably at least of the magnitude of that in July-August 07 or June-July 09, which means 10%, more or less.

Whether we then recover to chop around up here another few weeks like in Sept-Oct ’07 or fall straight down like 1930 and 1938 is anyone’s guess, but CPC, VIX, DSI and Treasuries all say there could be a major top in this vicinity. For an indication of what support follows that top, you can look at technicals and  fundamentals. The first major technical support is the SPX 900-950 area, where we peaked in January and June ’09 (and bottomed in Sept ’01), followed by 750-800 (bottom in Oct-Nov ’08 and Oct ’02 and March ’03), and then of course 666.

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Fundamentally, there is no value above SPX 450, a humdrum 11.25X multiple on expected 2009 earnings. Contrary to popular belief, $40 in earnings is not at all a depressed level relative to the last 15 years, but only compared to the very peak of the bubble in ’04-’07. At 450, the market would yield a bit under 5% on today’s dividends (which are still being cut and are only at 2005 levels). A 5% yield would be no huge bargain, but a lot better than the 2% investors are getting today.

For an indication of how quickly parties like this can end, take a look at what happened to the Brazilian stock market today:

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This US-traded Brazil ETF was down over 6% before noon today, leaving the previous four trading days as an island top. (I am short Brazilian stocks and the currency.)

If the US market does roll over here by 100 SPX points or so, keep an eye on the put:call ratio. I’ll be ratcheting down stops and very wary of a retest once the 10-day average gets a standard deviation above the mean (we must be 2 SDs under it right now). That said, it wouldn’t do to get stopped out on a 30% retracement only to see the market make an Acapulco cliff dive like in ’87, ’29, ’30 or ’38 as the crowd realizes that things have only gotten worse since last year. If this turns out to be a big third wave, it could take us straight to the March lows three months after the peak.

Chart roundup

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Greetings from the USA. I’ve been on the move and under the weather (why is it I only get colds in the US?) for a couple of weeks.

Here’s an old standby, 20-day average equity Put:Call vs. S&P500. As you can see, extreme readings are a very powerful indicator, but the market can take its time in responding, as it is now:

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The action these days reminds me of May-July 2007, with its extreme optimism, complacency and overvaluation. Remember how quickly things cracked in late July and August, when we went from Goldilocks to Cramer’s famous (and probably scripted) tantrum about how Bernanke needed to lower rates?

Here’s another chart I’m watching. Would you sell it short?

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The VIX has printed a new low, but its slope is flattening out:

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One measure of risk is not registering new extremes, the Gold:Silver ratio:

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Here’s TLT (30 year bond proxy) priced in gold. I’m not saying it’s definitely printed a bottom, but I wouldn’t short this:

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I gather people are starting to fret about gasoline prices again. I’m not worried, since sentiment is getting pretty lopsided even as prices fail to register new highs:

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To filter out the reflation effect, here’s crude oil priced in gold. It has done all it needs to clear the oversold condition, with a kiss of 0.08, last seen in early 2007:

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Dr. Copper’s also all cleared for a fall:

As for the funnymentals, revenues and earnings are still way down from Q3 2008, which was already well into the recession. Quarter over quarter improvements in operating earnings mean nothing without revenue growth, and pricing power is shot. Analyst estimates assume a return to peak earnings within two years, which is insane, since the credit bubble that produced those numbers is not coming back. Credit of every kind is still shrinking. Bank credit just went negative for the first time since the Fed started keeping track in 1974:

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This remains a technical rally, a relief of universally bearish sentiment that has turned into a momentum-driven, low-volume, low-participation mini-mania. When the momentum runs out, there won’t be a bid to stop the fall for hundreds of S&P points.

We’ve been at peak conditions for about two months now, in terms of the VIX, put:call and sentiment surveys, and prices have fulfilled all kinds of technical targets. What can’t be sustained, won’t.

With every new low in the VIX, I buy more puts

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Still in favor are Dec 2011 SPY LEAPS of various strikes, and today I’m eying market darlings Apple and Goldman. The chatter on these two being recession-proof is reaching a fever pitch, and while there is a kernel of truth to that story, their stock prices leave no room for error at these levels. Actually, even if these companies continue to prosper, their stocks will deflate as the market assigns lower multiples to the earnings of its strongest as well as weakest components.

REITS (proxy IYR) can’t hold up much longer either, their short-squeeze having run out of steam while rents start to plummet in earnest.

The question of the summer is how high this market will go while the global reprieve in mood lasts. That the NASDAQ is leading the pack reminds me of late 2007, when the market had started to roll over but the “tech horsemen” (AAPL, RIMM, AMZN, GOOG) kept on rising, against all reason. The fact that it has already reached such heights is a big warning sign. It has almost filled its October gap, a very nice target for a corrective bounce.

Above chart from google finance. BTW, check out wikinvest if you get a chance. It’s got a lot over google and yahoo’s stock pages.

Elliott Wave theory holds that corrections move in three waves (impulse moves in five), so this current push could be viewed as the C-wave in an A-B-C move. When it exhausts, a sea change may ensue, not just a minor reversal. With no fundamental support above SPX 400 (and weak support there), just such a paradigm shift is very much on the table.

It’s quiet out there

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Where did the fear go?  While no one was looking, the VIX just made a new post-crash low:

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If today’s market were a fishing trip, it would be 88 degrees at 11AM on a flat sea with no clouds and no signs of life. The only movement out there seems to be range-bound trading in currencies (the dollar is at the very bottom of its recent range) and a mild decline in oil. Times like these are good for establishing positions, whatever they may be. You can set tight stops or buy cheap options.

If the VIX gets much closer to 20, I’ll buy a lot more long-dated OTM puts. When this market rolls over, the revulsion is going to be horrific. This time it will be the death-knell of America’s equity culture, the dependence on stock appreciation for everything from exhorbitant college costs to retirement. The safety net is going to get ripped away, just like unemployment benefits for those laid off last year.

Americans still have barely changed their spending habits and long-term plans, but a year from now they will have, and plenty of them will be very upset about it. But never fear, our leaders know how to provide outlets for such emotions.