Sunday, March 11, 2012

Market Madness Weekly Market Update - 3/9/12

`It was an interesting week for US equity markets with significantly more volatility than we are used to seeing this year.

After a mild sell-off early in the week indices managed to recover their losses and finish positive by the close on Friday. The S&P 500, however, posted a gain of just 1.28 points--less than 0.001%--for the week. This doesn't seem so bad though if you consider the fact that it was down about 2.2% by late Tuesday afternoon. Meaning that the remaining three days mounted a rally of about 2.3% to finish where it did. Not bad overall. There was, however, some technical chart damage, some of which can be seen below. Aside from leaving behind a decidedly bearish candle formation several closely watched technical indicators also deteriorated. One of our personal favorites here at Market Madness is the ratio of SPX : RUT as a proxy for relative market strength (where generally trending higher=weaker market, lower=stronger market). This measure had been showing signs of turning upward since the beginning of February but has made a move lower this week. This will bear watching in coming weeks and if it makes a new high would argue for a more cautious approach moving forward.

The small cap RUT index was our best performer of the week, after two months of relative underperformance. Like other indices the RUT took a dive lower at week's open, down as much as 2%, but rebounded higher by Wednesday and continued on to finish up a respectable 1.88%, at 817 by Friday's close. That's a move from the midweek low, to the close of over +4%. It also moved us back inside previous channel support that was broken the week before. There has been tremendous technical strengthening in this index since last week's update and we have now seen the signs we had previously mentioned were needed to get positive on this index. It now seems likely that if equities strength resumes the small caps could now benefit more than their large cap peers. And certainly they should benefit more than they have been during the last couple months of this rally.

Not much comment here this week but to say that the tech composite remains relatively health technically speaking and very well could do quite nicely in a continuing bull rally. We don't believe this index is likely to give us much guidance as to overall market direction, however.

Ah the VIX. We've been somewhat harping on our VIX bottoming thesis for a couple weeks now. This week's action in our favorite volatility proxy has only reinforced this view. The VIX settled out the week sitting right at our support line after an impressive but short-lived spike upward early in the week as indices fell. Market Madness readers that are heavily invested in equities positions may want to take a good luck at buying some volatility as a hedge at this time. We believe that when this bottoming process completes, which we think it is heading towards doing, we could see a characteristic VIX spike, possibly up into the mid-20's, and probably very quickly and violently.

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