Remember, if you just want my forecast for the next trading day, you can get it right here, right up front with the Daily Hoot. Read on though for the reasoning and my take on the markets.
- Monday going higher, see bull & bear case below.
- Rest of the week uncertain due to approaching resistance levels.
- Monthly outlook more promising due to likelihood of Fed action in September.
The technicals
Being Sunday night I'm looking at the weekly charts of the Dow, the SPX, the SPY and TNA, which gives me a pretty good market cross-section. And I'm seeing pretty much the same thing all the way around. Let's check the wild animals and see how they stack up.
The bull case
All of the weekly indicators are oversold with the stochastic is executing a bullish crossover. The Dow and SPX are oh so close to having formed a bullish engulfing pattern over the last two days. In addition, the Dow's up volume last week was higher than the down volume the week before. And despite three days of essentially sideways action, the Dow remains inside a rising regression trend channel from a week ago. Those are all bullish signs.
And correspondingly, the daily VIX executed a classic dark cloud cover on Friday, indicating it wants to go lower. The weekly VIX chart shows highly oversold indicators that have peaked and are going lower. VIX futures continue lower too. This all points to a lower VIX, ergo higher stocks.
Next, and this is a big one, all three market futures are up at 12:35 AM EDT. ES is up nearly a full percent at 1187.75 and has no meaningful resistance until 1200.
And finally, we can pretty much forget about Hurricane Irene, which at least as far as Wall St. goes proved to be the Comet Kohutek of natural disasters. Overhyped and underforecasted, the surf whipped up by Irene couldn't hold a candle to the frenzy whipped up by the mass media.
The bear case
The US dollar index took a big dive on Friday down to near its monthly support level. Though it still has a bit of room to go lower tomorrow, I think it's going to be due for a reversal soon. Higher dollar implies lower stocks.
Meanwhile, oil seems to have bounced off the bottom of its recent trading range last Thursday. Friday it went higher and looks like it's got room to run Monday. Higher oil lately implies lower stocks.
The gold chart looks quite similar to oil. However, I note that my broker on Friday announced that they were going to be raising margins on gold again. This may put a damper on the metal, at least in the short run. So this is kind of a toss-up. The chart suggests gold going higher. But the influence of higher margins should kick in soon.
And the winner is ..
The bulls. Their case is clearly more convincing for Monday.
So Sell in September?
September's got a bad rap in the market. Check out a quote that appeared in this article on marketwatch.com today:
"September has been the worst-performing month of the year for the Dow and the S&P 500 since 1950, according to the Stock Trader’s Almanac."What they failed to mention was that if you look at the last 10 years, the Dow has been down just 5 times and actually up the other 5. Three of the down years included the 2001-2003 recession. One (real big one) came in 2008 during a truly exceptional time. Then I got to thinking, what about years where August was down big time? The last time that happened in the Dow was 1997 and 1998. In both those years, September was up. Going back to 1987, only one time was a bad August followed by a bad September, 1990. And that September wasn't nearly as bad as the August drop.
The End of the World Redux
Sorry to keep harping on this but is it just me or am I seeing more and more apocalyptic chatter on the web these days? I know I've done my part by posting my War With China piece, but some of these are really getting out there. Check out just one example, this from Expected Returns:
"This is a crisis in confidence, so things will get very volatile. Everything will occur in an accelerated timeline, including the rise of a third party in America (finally). Gold is going to explode with stocks. Civil unrest will appear, perhaps leading into 2012. We are very close to approaching the tipping point where confidence just falls off a cliff. This is just the warm up. People still don’t believe how bad things can get."As Count Floyd used to say on SCTV, "Scary stuff, eh kids?" Personally, I believe that 2012 is going to be a letdown but let's see what happens tomorrow first.
Posts
Thanks for keeping our eyes focused on the VIX. All are watching the VIX today, to see if it closes under its (still sharply rising) 20day SMA/mid Bollinger Band... it would be the first such decisive close since late July.
ReplyDeleteCloses above or below middling range averages, when they are against the well-defined slope of the average, often don't work out well as reversal signals. Nonetheless, it certainly gives more confidence to the bulls; as does the (short term) bottoming look to some key ratio indicators of posible risk aversion abating, like EEM:SPY.
Michele, I do have a question.. why are you using TNA in that combo of indexes, when the other three are all non-leveraged? Surely it just adds another computation, as you then have to adjust its daily percent gains or losses.. to match the others. Is there perhaps some quality to its investors, which gives its price action short term predictive power regarding the underlying Index? A smart money, or conversely, 'hot money' quality?
Thanks for writing. As you correctly note, the VIX is quite a powerful predictor of the market. My article "Can the VIX predict the market?" is my all-time most popular post. The VIX should be particularly interesting tonight.
ReplyDeleteThe original reason I began watching TNA is simply because that is what my pal J-Trader trades over on his blog (see sidebar).
I'm not sure it has any particular predictive power. It seems to be highly correlated with the SPX but then I haven't been watching it long enough to come to any conclusions, nor have I run any sort of quantitative cross-correlations on it though that's certainly worth looking into. If nothing else it is a quick way to watch the small-caps.
IWM is the non-leveraged ETF, and the Direxion 3X ETF more or less pivots off it, and off the RUT.
ReplyDeleteHowever, something useful the Direxion website offers is an easy tool for determining premium and discount (EOD) for its funds; and sometimes the leveraged funds show a skew or bias that the non-leveraged etfs don't.
In general, one buys exchange traded funds at a discount to NAV if possible, for the obvious reason of slightly enhanced bang for the buck.