Weekly Review

Hey, when you're right, you're right. Yesterday I wrote:

"tomorrow I'm looking for at least a gain comparable to today's, maybe more."

So yesterday we gained 21 points and today we gained 30. In fact, we had quite a week, with the Dow posting its biggest gain in 10 weeks, as you can see in this weekly Dow chart.

The Dow ended the week up 2.2% and is now up 3.61% year to date. Also, the famous First Five Days of January closed higher as did the entire month. And now we have the first week of February, which is historically not as strong as January, also closing higher and by a good amount. So far, it appears that 2011 is living up to the pre-presidential year historical effect mentioned in The Stock Traders Almanac: the year before an election, the market is up an average of 10.5%, almost as much as the other three years in the four year election cycle put together.

And therein lies the immediate question. With the rally having gone on so long now, I have to wonder if it isn't about time for the correction everyone is calling for to finally kick in. Although I'm pretty confident the year will end higher, it's pretty obvious that it won't move up in a straight line. We'll address that in my next post.

Performance

Although the Dow was up 0.25% today, I somehow managed to lose 0.29%. Oh well - that happens sometimes. In any case, I ended the week up 2.38% thanks to strong performance earlier this week. I am now up 4.77% year to date which puts me easily on track to match my 32% return of last year. My Sharpe ratio stands at 0.33.

Trades

Today I closed out my position in SPIL at 7.00 for a 1 3/4 point gain and removed it from my low price/high yield portfolio. SPIL has had a nice run and its current yield of 5.77% puts it at the bottom of the list anyway. I will be looking for another tech name to replace it with and put that money back to work.

Selling pressure abated

Well apparently the declining VIX today trumped history and the weak overnight futures. I was expecting a flat to lower close today. Instead we got a modest 20 point advance. Although that wasn't much, it makes me a bit more optimistic about tomorrow. Right now (1:05 AM EST) all three futures are up by about 0.1% and the VIX still has room to go lower tomorrow. Never underestimate the power of the VIX as a predictor.

In addition, we stopped the steady daily decline in volume from the past four days. Also, all the indicators have come off their overbought levels that we saw just before last Friday's 166 point dump. And on the history side, we note that the fifth trading day of February tends to be positive.

Note also that we had a bunch of economic news out today and most of it was actually above expectations, but the market reaction wasn't as positive as I might have expected. Tomorrow we've got some payroll numbers and the all-important unemployment rate coming out. I think any positive news there should send stocks higher, particularly since we've crossed the 12K level convincingly now. So tomorrow I'm looking for at least a gain comparable to today's, maybe more. We'll see.

No trades today.

Sideways to lower

I find it interesting how much the action of the last three days looks like the action from January 24-26th: an up day, followed by a big up day, followed by a flat day. According to this pattern, tomorrow should be like January 27th, or another flat to slightly lower day. This theory is supported by the volume bars. Look at how the volume has been declining steadily for the last three days, suggesting we're running out of buyers at these levels. Also, tomorrow is Thursday, generally a weak day in the weekly cycle. And the third trading session of February is historically worse than the first two days too.

In addition, all three futures are lower right now (1:15 AM EST). The one counter I can find is the VIX. It did go lower today as I was expecting, but it has room to go still lower tomorrow. This should mitigate against a large drop in stocks. Plus we now have the 12K level to act as support. This is mirrored in the S&P, which though it closed slightly lower today, also held its psychological even number at 1300.

So all in all, I'm looking for a flat to somewhat lower day tomorrow. The market may spend a few days at these levels recharging its batteries before continuing the march upward. We remain in the upward swing trend going back to December.

No trades today. The TIE I dumped yesterday did in fact move lower today, so I was correct on that one.

Uptrend resumes

Yesterday I thought we had a good shot at moving higher, but I sure wasn't expecting the nice 148 point pop we got in the Dow and I really didn't think we'd break the 12K barrier today. But we did, closing at 12,040. Notably, the S&P also closed above its own psychological level of 1300. Both of these numbers now become support. But because we've now gotten fairly extended again from the daily Dow pivot at 11,867, I'm not looking for another big gain tomorrow. However, I do think we can still end tomorrow up a bit from here. There is no significant resistance now between here and 13,000, that being the spring highs of 2008.

There's not much guidance from the futures right now. After climbing most of the evening, they're all down just slightly at this point (1:30 AM). But the VIX, which peaked on Friday did in fact fall considerably since then, as I expected. Once again, as I mentioned, when the VIX hits its upper Bollinger band, look for higher stock prices in a day or two. Right now, the VIX is still less than halfway back down to its lower Bollinger band, or even the point it was at before last Friday (just under 16). So that implies that stocks still have room to run higher tomorrow. And finally, we note that the second trading day of February is historically a good one (though not as good as the first day). We'll see.

Trades

Today I added to my position in DHY at 3.04 for my low price/high yield portfolio. I sold my TIE at 19.28; it closed at 19.37. And I bought a bit of C at 4.87.

Trend unclear, upside favored

Yesterday I wrote that I was more optimistic about today becasue the VIX looked like it was going to reverse course. It was indeed unable to advance any further and we were rewarded with a 68 point gain in the Dow to close at 11,892, putting us back above the 11,867 resistance line. With the futures now up (at 2 AM EST) by 0.19% to 0.38% and the VIX looking like it will decline further tomorrow, I'm fairly confident that Friday's drop was not the start of "the correction" everyone is waiting for. All it seems to have done was relieve some of the overbought pressure that stalled our attempts to cross the 12K level last week. It looks to me like we may be gearing up for another attempt later this week, though probably not tomorrow just yet.

In the meantime, we're waiting for a new swing trend to become apparent though I should note that we still remain within the middle of the longer uptrend going back to the start of last December.

No trades today.

Maybe not so bad

I was really curious to see how the futures would act when trading resumed this evening. As expected, they gapped down on the open. Then something unexpected happened - they reversed and started climbing. And right now (1:30 AM EST) all three futures (ES, NQ, and YM) are actually positive, with the ES actually up a respectable 0.14%. In fact the ES is forming a nice hammer, and the up volume is quite extraordinary - much higher than last Friday. This all makes me believe that the market is not going to be spooked by the events in Egypt. For more clues on where we may be headed in the near term, let's look at the weekly VIX.Last week of course the VIX continued the rise it began two weeks ago. But it looks like it ended up forming a hanging man and it was unable to break out above its descending RTC channel as you can see in this weekly chart.

Zooming in to the daily VIX, we can see how last Friday's big pop took it right up to its upper Bollinger band. Over the last two years, every time this has happened, the VIX came back down either the next day or no more than two days. The one exception was back in May of last year when all the European debt business broke.

So right now, I'm a bit more optimistic about tomorrow than I was on Friday. I don't think we're going to attack the 12K level again right away, but I also don't see another big down day on Monday. Also, there's some news on personal spending for December coming out. Although expectations are higher, it wouldn't surprise me to see the numbers met or even beaten, judging by what I personally observed in stores last month. We'll see.

I was ready to short some ES this evening as insurance against tomorrow. Now I'm just going to wait and see. Tomorrow's action will determine if we're going to start a new trend or not.