Saturday, March 17, 2012

UGA Charts and Analysis - 3/16/12

UGA Gasoline Fund - Charts and Technical Analysis

March, 16 2012
After its most recent breakout the US gasoline fund, UGA, had entered a period of consolidation beginning near the end of February and looks set continue with sideways its price action. While most indications are that we are in for another period of volatile but sideways movement (potentially building another solid foundation for a new rally) one thing this chart does have going for it is the move off of channel support today. This keeps us inside that trend channel and in sight of challenging those recent highs.If it can break those highs then all bets are off and we very well could see a strong move up from there. Our projection, however, remains for consolidation to continue at this level for at least the near future.

MACD continues to weaken and our Multi-Slow Stochastic measurement is both mixed, and near the middle of its range, suggesting neither weakness nor strength and instead implying sideways price action is most likely.

UGA gasoline fund chart and technical analysis

Stay safe out there!
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Friday, March 16, 2012

10 Great Investment Books For 2012 and Beyond

These great investment books will help you navigate the challenging environment of 2012, and beyond.

S&P 500 Index Chart - Volatile

Great investment books are an important tool to have in any environment. The last several years have been ones of uncertainty, economic shocks, and extreme market volatility. What's more, many economists and financial markets experts warn that this environment is likely to continue for some time. It can be a frustrating and difficult environment to invest in for even the very best of wall-street's traders. For your average retail investor, it can be an utter nightmare. Your choice of investment books is even more important in times such as these.

And it is with navigating this challenging environment in mind that we present below 10 great investment books for 2012, and beyond.
The Stock Trader’s Almanac 2012 is a general reference investment book that is widely used by serious traders and considered a must have by many. This is a great investment book for both experienced traders and those just getting started. And it is an investment book just as much as it is a traders book. Both will find great value here. Like all the best Almanacs it is crammed with useful, currently relevant information. Much of which can lead to actionable investment ideas. You will find inside graphs, historical charts, market data, forecasts, economic announcements, and a calendar of events. Along with plenty of commentary and analysis. One of the most useful aspects of the almanac  is its ability to help you identify specific trends that tend to happen on a yearly or cyclical basis and assess the probability of whether or not a similar trend could take place in the current period.


The Commodity Trader's Almanac is a superb companion to the above recommended book. It has all the same great content as the Stock Trader's Almanac, but for the commodities. For commodities traders it is a priceless reference. For those who don't dabble in commodities it can still give great insights into relationships between commodity and equities prices and patterns. An investment book definitely worth picking up and both this and its companion are frequent go to books in my daily analysis work.

Whether trader, long-term investor, or both technical analysis is a must for your toolbox. This great investment book is the best modern all-around technical analysis books out there and my personal copy has so many "post-it" notes sticking out of it that they should probably be numbered like pages. This book is more like a reference textbook for a college course on technical analysis than a "book" in the usual sense. It is packed with all things technical and countless traders have been using it for over a decade now for very good reason. If you have a question about any technical indicator or concept in technical analysis you can most likely find the answer here. The only Technical Analysis (TA) reference book you will ever need. Not much else need be said even. Outstanding investment book.

Overhyped title aside, this is a great investment book folks. Fund manager Joel Greenblatt has been beating the Dow (with returns of 50 percent a year) for more than a decade. In this insightful book Greenblatt brings you into a world of special situations from which you can profit.

Special situations in which big profits are possible, including:
* Spin-offs * Restructurings * Merger Securities
* Mergers * Rights Offerings * Recapitalizations
* Bankruptcies * Risk Arbitrage

The author's approach is an event-driven one and he gives an outstanding overview of these special situations and how you can take advantage of the fact that they are so often overlooked by other investors. This certainly isn't an investment book for beginners--who should concentrate on building solid foundation on the basics first--but if you are an experienced investor and you haven't yet read this book you should do so. You'll be glad you did. However, while it is a book for the serious investor it is also written for the retail investor and professionals involved in event-driven investing would probably find little they didn't already know here.

The best endorsement of the book that I can give comes straight from the book itself. It comes in the form of publication of the his firm's audited returns over a decade-long period at the end of the book. No pure theorist here and the firm's impressive returns show that in spades. We're talking 45-55% average returns over a ten-year period! Not bad, not bad at all. Pick this one up at your soonest opportunity.

Sticking with the theme of volatility which is, after all, the theme of the last few years and a theme which is likely to continue for several more; we bring you Short Term Trading Strategies That Work. Author, trader, CEO, and founder of TradingMarkets; Larry Connors gets it right with this one. It is a no-nonsense, clearly penned book. Published in 2008 it is still one of the best books out there for short term market traders. This is more true than ever in these volatile and uncertain times.

In this great investment book Connors lays out 16 straightforward strategies that every trader, and I mean every trader should have in their toolbox if they want to be a successful trader. He shows back-testing results that go back several years but also includes live-trading results from Connors and his team under various market conditions.

Connors adheres to two major themes throughout the book and all else in it extends from those themes:
1. Always Trust long term momentum
2. Buy short-term lows, sell short-term highs.

Connors doesn't stick to patterns on a chart though. No. Like our previous author Connors explores areas that most traders and financial pundits know little about. Better yet he constructs strategies with simple rules that any experienced trader can utilize.

I do believe that this book is probably best for experienced, serious traders though and that novices will  probably be let down, and left uncertain on how to actually act on the great insights contained in this book. The experienced, serious trader on the other hand will find graet value here and shouldn't have any problem translating these insights into actionable trade ideas. A great investment book to add to your shelf.

Knowing how to effectively trade volatile markets is an important part of any trader's education. This is especially true in today's tumultuous environment. And whether just venturing beyond plain vanilla stock trading or an experienced options trader; this great investment book by can improve your trading.

As the title strongly implies the focus is on strategies that can take advantage of volatility. This book is written especially for retail investors/traders and one area where it shines is its clear language and precise explanations of concepts. He also makes frequent use of detailed trade examples to illustrate these concepts. The author takes a simple approach that uses flag chart patterns in trending stocks and explains exactly how to develop a trading plan based on them.

Chapter Topics Include:
An introduction to options - This can be skipped by experienced options traders but should be carefully studied by the novice.
The authors favorite technical chart patterns - It is by no means a guide to chart patterns in general and focuses on just a few of the "best" which are explained thoroughly.
The Greeks explained - And how to use them properly
All the author's favorite options strategies - And how you can use them in your trading

The author also discusses in detail a strategy involving ratio-backspreads which have the potential to manage risk better. It was a strategy I had never come across before and it is one of the strong points in this book.

For those interested in the math surrounding options trading and its strategies he goes through some of the mathematical algorithms behind it all. Believe it or not it is actually quite helpful to at least have a general understanding of what is happening "behind the scenes," so to speak. But it isn't necessary by any stretch.
A great investment book for traders to have in their 2012 arsenal.

Of a different flavor than previously listed texts Common Stocks and Uncommon Profits and Other Writings is just one of those classics that must be on the list for its sheer utility. Not many investment books can stand the test of time but Philip Fisher's masterpiece, first published in 1958, has done just that and more.

This updated version still contains all the relevant material of the original, while also including perspectives from the author's son, Ken Fisher. A man who has made his own way in the trading world quite well. Philip Fisher was a genuis at his work and both traders and investors alike are cheating themselves if they don't study his great work. This one should be on any market participant's bookshelf, front and center.

Index Funds are great. And they are great for traders too, not just your "buy and hold" investors looking for a low expense way to diversify. As suggested by the title, however, this investment book is in fact dedicated to a passive, "buy and hold" approach to investing. Nonetheless it is simply a great book all-around.

The author, Mark Hebner, reveals the potential risks and problems of active investing which will be helpful in your assessments even if you do actively trade. And help you avoid "overtrading" if active trading isn't your goal. Hebner's book lays out the risks of stock picking, mutual fund manager picking, market timing, and other activities which can negatively impact your profitability. Hebner offers a "scientific," fundamental based approach to long term investing that many may find unfamiliar. You can only benefit from an incorporation of Hebner's best ideas into your own analysis and for those looking to reduce risk exposure, this great investment book is a must have.

Kenneth A. Posner spent close to two decades as a Wall Street analyst, tracking the so-called "specialty finance" sector, which included controversial companies such as Countrywide, Fannie Mae, Freddie Mac, CIT, and MasterCard—many of which were caught in the subprime mortgage and capital markets crisis of 2007. While extreme volatility is nothing new in finance, the recent downturn caught many off guard, indicating that the traditional approach to decision making had let them down. Introducing a new framework for handling and evaluating extreme risk, Posner draws on years of experience to show how decision makers can best cope with the "Black Swans" of our time.
Posner has seen it first hand and knows from his own experience what being caught out by a "black swan" event in the financial sphere is like. Unpleasant to say the least. But can they be prepared for or otherwise made at least less unpleasant?

In this great investment book for our times Posner traces out various sources of what most of us percive as "surpise events" and illustrates a practical approach for attempting to mitigate some of the "unpleasant" effects they may cause. This is an absolutely must have book for 2012 and the uncertain environment we find ourselves. Both for trading and in other areas of our life where a little "insurance" against black swans may be appropriate.

The author also asks and attempts to answer some outstanding questions in this book such as:
How do highly intelligent bankers and investors get surprised and brought down by financial crises created by their own interactions?
Why can't formulaic rules and regulations prevent such crises?
How can sophisticated models be so far off?
How can one cope with the 'the unpredictability of collective action'?

His exploration of, and answers to, these profound questions comes off as being at the very least honest and thoughtful. But they are also thorough and instructive. Posner, as a top-notch analyst, is someone whose investing philosophy has influenced a lot of people, including  myself, over the years. And this book is another great resource coming from him.

One of the most fascinating aspects of the book is the trip through memory lane with  Posner  to revisit the calls he made on some of the most controversial financial firms smack in the middle of one of the most volatile environments in modern financial history.

While not specifically about investing or trading Posner's book is one that should be on every trader and investors bookshelf for the years ahead. This great investment book truly provides a rounded education in decision making during periods of elevated uncertainty and volatility while giving the reader a pleasant story to read.

We must offer up one more book that cannot be strictly considered an "investing" or "trading" book. It is well worth the departure. Extraordinary Popular Delusions & the Madness of Crowds is quite possibly the single most relevant and timely book of the bunch for our times. This despite the fact that its first publication was in, wait for it...1841.

Why do otherwise intelligent individuals form seething masses of idiocy when they engage in collective action? Why do financially sensible people jump lemming-like into hare-brained speculative frenzies--only to jump broker-like out of windows when their fantasies dissolve?
These are just some of the questions Charles Mackay asks, and answers in this olb but brilliant masterpiece. Truly an education on the "boom - bust" phenomenon this book and its subject apply just well to the NASDAQ and Housing bubbles of today as to the events he details in the book. If you haven't already heard of, or read this great book you need to put it near the top of your list now. Go ahead, we'll wait.

Well, that's it! Now you're armed with knowledge of 10 great investment books for 2012, and beyond. Read them, study them, get out there and profit!

Market Madness Daily Market Update - 3/16/12

It was a relatively uneventful day for the major indices with flat finishes across the board with slightly more selling than buying taking place. Our Friday update will therefore be brief as usual and we'll see you back here on Sunday for our Weekly market updates and index charts.

Have a great weekend!

The standout winner of the day was Bank of America (BAC) with a 6% gain of 58 cents to close at $9.80. It was just four short days ago that this stock was at $8. That's a gain of  %22.5 in four days! Incredible. And there couldn't be a less deserving company (well OK, there probably could be a less deserving company out there somewhere...)

The DOW shed about 20 points to close at 13232 for a 0.15% loss for the day which tracks right with other indices. The tech composite (COMP) gave up a little less barely even registering a loss at -0.04%, or 1.11 points. The VIX on the other hand plunged again today, losing almost a whole point from its already historically low levels to close at 14.47. A loss of over 6%. As noted in updates of the last few days this has begun to put into serious question our view in prior weeks of a VIX bottoming process. Time to reevaluate.

Charting only the S&P 500 (SPX) and Russell 2000 (RUT) today first up is the SPX. Finishing barely in the green today with a 0.11%, 1.57 point gain this index remains quite healthy. If positive sentiment continues there is no reason why the index shouldn't go on setting new highs for the time being. There is certainly little technical resistance to doing so. MACD further improved on the daily frame while our MultiSlow-Stochastic readings appear to be turning in agreement with each other. That latter could be a sign of impending correction of some sort and indeed, we do find a modest correction down to the major trendline/2011 highs to be the most likely outcome.

We pointed out yesterday that the RUT was right back at its upper channell resistance yet again and that this has been a big challenge for the index. And once again, we pulled back off that resistance to close lower by 0.15%, or 1.28 points. Between the small magnitude of the loss and today's environment of overall market weakness we can't learn anything from today about the likely relative performance of this index going forward. Monday should provide more clarity on the situation.

Thursday, March 15, 2012

Market Madness Daily Market Update - 3/15/12

Index Chart Updates and Analysis for March, 15 2012

S&P 500 Tops 1,400 On Economic Reports
U.S. stocks advanced, sending the Standard & Poor’s 500 Index above 1,400 for the first time in almost four years, as data showed manufacturing in the New York region unexpectedly increased and jobless claims declined.
Macro news continues to follow the market upward. The market has led the news this entire rally and the increasingly positive macro measurements are putting the bear case in serious doubt. That is, of course, if the numbers can be trusted and are not just being manipulated or propped up by expansionary policies. At Market Madness we don't consider that possibility to be all that far fetched, however.

Most major indices finished at or near their highs of the day for gains of around 0.5% With the small cap Russell 2000 index outperforming on a gain just under 1%. The VIX was basically flat for the day creeping up from 15.31 to 15.42 for .11, 0.72% rise.

The S&P 500 index (SPX) finished right at its highs of the day with a gain of 8.32 (0.60%) points to 1402.6
With another strong day for buyers this market continues to impress (and sometimes baffle). Technicals also further improved with MACD gaining some steam and a return to a declining SPX : RUT ratio. The "projected" lines on the chart below represent nothing more than a "most probable" outcome based on purely technical analysis and, without further supporting evidence, should be given little more weight than any other guess.

Semiconductors had a great day today with a 2% gain for the SOX index. We noted in our weekly market update of 3/2/12 that this it was approaching an important support level to the downside and to look for a bounce off that level (at 400). After that actually did come to pass we then voiced the view in our daily market update for 3/7/12 that this index could run faster, and farther than other indices on continuing market strength. It may now be approaching some overhead resistance around the 440 level and more caution is prudent for now until we see how price interacts with that level.

The RUT outperformed its peers today with a gain of 8 points for 0.98% to close out the day at 831.46. After this day of respectable gains for the RUT it is now right back up against that channel support. And once again it is clearing this level that is, and has been, the major hurdle for this index. This will be a chart to watch tomorrow. If it can finally break that barrier this index should be best positioned for relative outperformance in an environment of overall market strength.

As always Good Luck and Stay Safe!

Market Madness Daily Market Update - 3/2/12

Market Madness Financial Headline of The Day:
Yelp! IPO Soars 60% Despite Mixed Reviews
"Yelp! sold 7.1 million shares at $15 which was above the targeted $12-$14 range and valued the money losing venture at just under a billion dollars."
Market Madness recommends its readers stay far away from this turd.

Also worth mentioning before we get to the indices was the action in crude today, which has pulled back a bit from yesterday's level to trade currently at around $106.50, a retracement of over 2%. Market Madness believes crude may not be done with its move, however, and expects to see further upward price pressure in coming weeks.

Well, for the S&P 500 it was another day of oscillating around that 2011 high water mark of 1370. Not surprisingly, that's also where it ended the day, down about 4.5 points at 1369.63. Despite this decidedly mild selling, overall this index chart remains fairly healthy and technicals, while weakening, remain net positive. With that said, Market Madness advocates for a "wait and see" approach to this index as long as it continues to flirt with this important level.

Moving on to small caps we can see the profound weakness in this index with even a superficial look at its chart. In addition to losing its trendline support earlier in the month we now have a convincing break below channel support of the last several weeks. We have previously advised readers to keep a very close eye on this index and this is just the sort of thing that we were keeping our eyes out for. We feel that this is the most probable place for any significant selling pressure to appear first. And it now appears that may in fact be what is happening here. Though it is too soon to have much certainty.

One reading of particular note today is that of our SPX/RUT and RUT/COMP relative strength ratios.  These are found at the bottom of all our daily charts and as you can see small cap relative strength readings have plummeted dramatically since late last week. Another blog that has been harping on this disconnect here--even more than we have--notes this afternoon that the one-day reading of this divergence exploded today, with a reading of almost 4 to 1.
That posting apparently came a bit early, however, because by the end of the day that reading was actually almost 5 to 1! (-1.57% RUT/-0.32% SPX). This should not be comforting to buyers.

We wanted to touch just very briefly on the Semiconductors today. The semiconductor index (SOX) has had it nearly as bad as the RUT lately and if this keeps up it could have negative implications for tech indices. As it stands now it is simply something that bears watching but if we were to see a rapid deterioration from this level we would get much more cautious on the other indices.

Don't forget to check back on Sunday for your Weekly Market Madness Recap!
Have A Great Weekend Everyone!

Wednesday, March 14, 2012

Market Madness Daily Market Update - 3/14/12

Quick Headlines:
Commodities got whipped today with Gold and Silver taking an especially rough beating.
Big winners for the day included AAPL with a 21 point, 3.8% gain and BAC (ugh) with a gain of just over 4%

Major indices were both flat and mixed today with the one major exception being the small cap Russell 2000 index which gave up just under 1%. We'll get to that in more detail later on below with its chart. The DOW and the tech composite both managed to finish the day slightly in the green with gains of +0.03% and +0.12% respectively. Just holding on to the great gains of yesterday can be considered a big win for the bulls today.

Our first chart today is the SPX (which we prefer over using the SPY ETF as a proxy). The S&P 500 today shed just 1.67 points down to 1394 which, on a percentage basis, is exactly what the DOW gained, 0.12%.
This again can easily be seen as a win for the bull camp and in addition many technicals also continued to improve today. We feel that a correction down to the 1370 level is both probable, and important to building a new base from which to continue the bull run. A successful test and bounce up would be a strong sign of health while a failed test and break under would be more ambiguous. You can see our projection of the most likely progression from here drawn as the white lines in the chart below. Of course, it may also not even move to test that level and just continue on from here. We are also approaching the top of an ascending wedge formation. MACD confirmed its crossover today despite the minor losses but the SPX : RUT ratio reversed higher on the RUT's pronounced under-performance. 

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Which brings us to the RUT chart. We had mentioned yesterday that of all the major indices the RUT faced the most immediate potential for resistance. The index had finished the day yesterday sitting right below prior channel resistance of the last 45 days. And as noted in today's intro this index had by far the worst day of the bunch losing almost 8 points, for a -0.94% decline. Now sitting in the middle of that channel it would be interesting if it simply resumed its sideways movement from here. Despite the losses of the day it wasn't enough to negate the MACD crossover into "buy" territory. However, the RUT: COMP ratio (as previously mentioned) obviously reversed sharply lower on today's under-performance. This reversal was of a large enough magnitude to put into question the previously developing turnaround in that RUT : COMP relative strength measure.

We want to touch only briefly on the tech composite today. This index also experienced an MACD "buy" crossover signal today while our COMP : SPX ratio continued to climb. We are now, however, bumping right up against the prior trendline but this probably won't pose much problem if overall market strength was to continue.

The VIX rose moderately today with a 3.5% gain of half a point to finish at 15.31 at the close. MACD averages are also getting quite close to crossing above the zero line for the first time since December. The white line tacked on to the end of the price action in the chart below represents what we feel would constitute a breakout. If this move were to develop it would almost surely drag MACD lines above that zero line and we believe it could easily move very quickly from there into the mid-20's. If this move fails to materialize over the next two-weeks then our bottoming thesis would be in serious question and would need to be carefully reevaluated.

Stay safe out there!

Tuesday, March 13, 2012

Market Madness Daily Market Update - 3/13/12

Market Update for March, 13th
The "Market Madness" moniker is certainly appropriate today.

There were some market driving events and headlines today and it made for a wild ride but at the end of the day it was the best day for markets this year. In a year with a lot of good days so far.

The FED's FMOC met today which was one driving event of course. Though the outcome of the meeting was mostly unchanged wording the FED did report that they see a "Slightly improving economy."
From Reuters: "Fed holds steady course, offers few clues on future."

Treasuries also fell sharply with yields rising to 2012 highs. The highest yields since October 2011 actually. No surprise there with the strength seen in equities today. In other indices the DOW rose to its highest level since 2007, closing at 13177 for a roughly 1.7% gain, the least of all major indices but still impressive. The Composite breached the 3000 level again but this time leaves a little room for pullback and is in a better position to challenge higher levels than previously. Assuming a continuing strong market, of course.

On to our charts for the day. The SPX started the morning with a strong gap up to 1378 and then spent most of the day after that gently drifting upwards until late afternoon. The final hour of the day saw some fireworks though and it was buy buy buy from then until the close, where we finished the day at just over 1396. A gain on the day of over 1.8% and 24.9 points. Its best day since mid-December. It was enough to trigger a MACD crossover signal back over into green and the SPX : RUT relative strength measure continued to improve as well. We are no doubt approaching some overhead resistance at these levels and the area between 1400 and 1420 is probably going to be tougher to cross than the preceding 40 points or so. We should probably expect to see a mild pullback early on tomorrow but whether or not sellers can hold the day is in question.

The final hour burst, by the way, was probably brought to us courtesy of JP Morgan with a huge stock buyback program and some helpful leaking of positive "stress test" results.

The small cap RUT index continued to show marked improvement today. Both in absolute terms (obviously) and relative terms vs. other indices. Technicals improved across many measures and MACD in particular appears to be headed for imminent crossover into the green for the first time in a month. Our RUT : COMP relative strength proxy also inched up a bit today, with underlying indices mostly tracking closely across the board.
We had reversed course and gotten more bullish on this index late last week and, indeed, still feel that it has some room to run left. More so than other indices in many cases. However, it's important to note that it is now sitting right below prior channel support of over a months duration. If it can clear this small hurdle then it has some room before running into the next significant technical resistance.

And it was another day of "VIX Gone Wild!" viewing pleasure. We started the day with a gap down from the already low level of 15.6 to a mind-bending 13.99 low! A plunge of over 10% and the first time hitting those level since June of '07. This early morning plunge, however, was followed promptly by a rebound. A rebound of over 14%. From an intraday low of 13.99 to the intraday high of 16.08, or +14.94% from bottom to top. After some large, erratic swings later on it settled down a tad before the closing bell to finish at 14.8, a drop of a bit over 5%. Incredible day for the VIX.
We believe the bottom is probably in for volatility and further, that it is unlikely to move sideways for any extended period. We'd love to hear you views.

Stay safe out there folks!

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VIX UP Over 14% From Intraday Lows

As of the time of this writing the VIX, after gapping down to an incredible 5-year low of 14, has rebounded sharply off its lows to nearly 16 points. A move of over +14% from the morning lows.

Very interesting indeed. See you after the closing bell for our full daily market recap!

If you haven't read our recent VIX commentary you can it towards the end of our daily and weekly market updates including 3/12/12 market update, 3/9/12 weekly market update, and 3/02/12 market update. Among others.

Monday, March 12, 2012

Market Madness Daily Market Update - 3/12/12


It was a largely uneventful day in the markets with flat trading in most US indices. The DOW and the S&P both managed to finish just slightly in the green with other indices just to the other side in the red. The DOW gained about 37 points (+0.29%) and the S&P posted up a mere 0.22 points, or +0.02%.

Diving into some charts lets start off with the large cap SPX below. As you can see the rebound is "stalled" right at our 2011 high water mark, and just below the new high from two weeks ago. What we don't want to see here is another "correction" prior to breaking to new highs above those of two weeks ago, at a mere 7 points away. This would leave behind an ugly double-top formation on the charts and a lot of traders watch that. On the other hand, technicals, including MACD and the SPX : RUT ratio, continued to show some improvement today. Suggesting a strong possibility of topping those levels this week. Price/technical action is  currently presenting a bullish case while other factor argue for more caution. This has been a rough market to be cautious in, however.

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Our most commented on index of late, the small cap RUT, finished the day down about 1/3% to sit right on our prior channel support at 814. Despite today's less than stellar action the technical improvements in this index over the last several trading sessions still leaves it in much better shape than it has been since late January. And we remain much less bearish on the index than we were prior to last week's action. MACD also continued to improve, while the RUT : COMP ratio pulled back slightly for the day (deteriorated). Watch for a bounce off this support level (810-814) tomorrow if indices overall show any strength.

But the big mover and shaker of the day was the VIX. And boy did it move! The volatility measure plummeted a whopping -1.47 points from an already low level of just over 17, to its close at 15.64. A drop of over 8.5% for an utterly flat day in the underlying index! What does this do to our bottoming thesis? Well this may be counter-intuitive (or just plain wrong) but we see this as a strong sign of support for our thesis. Capitulation if you will. The last time the VIX reached these levels was July, 7th 2011. This was followed immediately by a spike, first to the low 20's, and then on to the upper 40's shortly after that. While we have no reason to suspect any kind of jump back up into the upper 40's, we can easily see a spike into the mid-20's occurring in short order.
You can see more on this bottoming view here, here, here, and here. Among other places.

Stay safe out there!

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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.