Thursday, March 8, 2012

Market Madness Daily Market Update - 3/8/12

It was a good day for bulls today.

The action driving headline of the day comes courtesy of the EZ:
"Greece Confident of Bond Swap Approval"
And later in the day...
"Greece Swap Deadline Passes as Investors Signal Deal"
While it's great that this chapter of the drama has been closed the most likely outcome will simply be the opening of the next, even more dramatic chapter. The EZ will be signing the blues for some time yet and will continue to negatively impact US firms and markets. But can US economic strength (if any exists) overwhelm EZ economic weakness?

After its largest 2-day gain since Mid-December the S&P 500 managed today to finish convincingly above its close of Monday. A key level in our analysis and one that we mentioned in a Mid-Day Madness blurb earlier would need to be crossed for confirmation of the nature of this pullback. Market Madness now feels that the verdict is in and that this rally will likely continue, for now. As we have pointed out previously both the duration and magnitude of pullbacks (and therefore volatility) has been steadily decreasing since the Oct. 4 bottom. This trend now has no more room to run as these pullbacks simply cannot get any smaller in duration and magnitude. If this market does indeed make another run upwards Market Madness' technical analysis suggests it is likely to be a relatively short, steep run followed by an equally short and steep decline as volatility first evaporates, and then explodes upwards. This analysis, however, is based solely on the technicals, and past price patterns of a similar nature and should be incorporated into a more complete analysis.

Another potentially positive development for this market rally was today's performance of tech, and high beta issues. The NASDAQ Composite measure finished the day with a gain of 1.18%, or 34.7 points, outperforming the large caps and DOW components by a respectable margin. Apple, of course, continues to be the driving force behind this index and where she goes, the index goes. Apple had a nice 2%+ day today, therefore dragging the COMP up along with it. Technicals overall improved significantly today and MACD and the COMP:SPX relative strength ratio in particular showed improvement, with the relative strength reading reversing its "sell" signal from the beginning of the week.

The strongest performance of the day though came from the small cap RUT index. She posted an impressive gain of over 1.3% today. This gain is made even more impressive by the fact that, in contrast to the other majors, the RUT actually fell sharply at the open, completely erasing its overnight gap up. By 11:15 EST, however, it had fought its way back up to even. From there it then proceeded to steadily drift upwards for the remainder of the day, closing at 806.34. This was the first day of technical improvement for this index in a shockingly long time. MACD readings flattened from decline and our RUT:COMP relative strength measure not only improved, but is now showing signs of a possible bottoming and reversal. This is one of the signs we previously said we would need to see to get bullish on this index. We are not there yet but today was a crucial first step.

The VIX volatility measure declined steeply again on today's gains, finishing down 1.12 points for a 5.87% loss. We believe that the bottom is basically in for the VIX. We have previously mentioned on several occasions our view that the VIX may have been forming a bottom over the last few weeks and our analysis is now suggesting that that process is near completion. We recommend keeping close tabs on the VIX over the next few days and watching for either a bounce off of, or a clean break through our multi-year bottom support at around the 16.5 level.

The last week has been an important "proving" event for this rally. If we can finish this week solidly in the green Market Madness will be much more positive on this market than we have been of late. This is largely because we believe that significant sidelined capital could come out to play if such an event comes to pass.

Stay safe out there!

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