Tuesday, June 26, 2007

A Puzzling Disconnect

Reflecting on the market, I'm reminded of the words of Robot B-9:

"Does not compute".

On a day that no index closed off more than 0.5%, the VIX shot up 13%! Also, Tuesday marked the 3rd time in 14 sessions that the VIX closed above its upper Bollinger band. However, these aren't even the stats that fail to compute.

In the past five sessions, the SPX has shed 2.6% while the VIX has skyrocketed an eye-popping 48%!

Option investors are clearly spooked, but the stock market doesn't seem to share this sense of dread. In fact, it's hard to tell what institutional investors are feeling.

For the second straight day, neither bulls nor bears established an advantage, and on Tuesday the NASDAQ closed off just 0.1%. Despite mortgage-backed hand wringing and congressional saber-rattling, sellers were unable to push the NASDAQ even 0.7% lower to the 50-day. While option volatility yapped like a chihuahua, NASDAQ volume fell 1%.

In a continuing theme, leading stocks continue to show few signs of wear. The IBD100 slipped in-line at 0.5%, though 22 stocks did print distribution days. This total is up from 16 on Monday, but it's hardly unusual. A look through all 100 stocks tonight reveals an IBD100 with a distinctly bullish bias.

Without a doubt, the broader market is very wobbly with abundant downside risks. However, it's apparently going to take more than subprime contagion, weak housing, soaring volatility, foreign selloffs, falling consumer sentiment, and 5% Treasury yields to convince investors that it's finally time to start selling with gusto. Obviously, investors want some really bad news.

After seven sessions of weakness, the bears are left with a NASDAQ that's still above its 50-day, but that's now oversold. In fact, the Composite hasn't been this oversold since the China meltdown in March. Furthermore, it's oversold in an uptrend, which wasn't the case in March.

This is a great situation for the bulls, but it's meaningless unless buyers show up to press the advantage. For whatever reason, that hasn't been the case for a while. The chart below is one the bears can destroy in a single afternoon.

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After the Shanghai surprise in late February, the VIX popped into a new gear and hasn't downshifted since. It's important to realize that as the VIX soars to levels near the March highs, the NASDAQ is over 300 points higher since then! Equities have stomached this new rise in volatility with great conviction.

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If the market was headed for real trouble, systemic "flight to quality" rotations would be visible to the naked eye. Since the first of June, the NASDAQ is down 1.2%, the SPX is off 2.5%, but Consumer Staples are off 3.5%. Considering that the 10-year bond is down 4.3% as well, there are few signs of a market hunkering down for bad weather.

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Another interesting development is the precious metals' continued de-correlation with the financial markets. I've written about this before, but even though inflation risks remain high and mortgage unknowns abound, gold and silver aren't acting as a safe haven. Reasons for this are discussed in the link above, but for now, no asset class is taking the current market woes harder than gold and silver. Silver had a very bad day today and slipped below its 200-day. Surprisingly, the XAU leads all asset classes lower in June with a 5% slide.

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This is a near-impossible market to call short-term. Even if you get it right, the volatility prevents you from staying that way for very long. The bears are in control, and one slice of bad news could push the market past the point of no return.

On the other hand, lots of things still "don't compute". Volatility aside, it will be interesting to discover why the fundamental leadership has stayed so strong during these trying times.

Robot B-9 had another, even more famous phrase. Until the market finishes strong each day on huge volume, I'll continue to heed the unforgettable, "Danger! Danger! Will Robinson."

Until tomorrow, have a great evening.




muckdog said...

Hey DK, all we need is a kind word or two from Hank or Ben to get this thing moving up again.

Then we'll be left wondering if it was Ben, Hank, end-of-month, or end-of-quarter stuff.

Charts are a great way to predict the past. I need to get to work on that time machine...

Bill Luby said...

Excellent work, DK.

If you have any desire to go out on a limb and provide some color on what constitutes "the point of no return" and what it might translate to from a TA perspective, I promise not to hold you to it if the future turns out differently... :)



P.S. Thanks for the kind words on my remembrance of my mother. I appreciate it a great deal.

dk said...

Hey Bill...thanks. "Point of no return" contains a touch of literary hyperbole, as there's always the high probability of an eventual return. In this market, my shorthand can be decoded as a visit to the 200-day; if that fails, a 50% Fib retracement.

Your thoughts on your Mom give every son reason for pause. Blessings on you both.