Market Madness Weekly Market Update - 3/16/12

Index Charts and Commentary for Week of March, 16, 2012

I hope everyone had a great weekend!

It was an outstanding week for US markets with new "recovery" highs for most major indices. Getting right to the charts today we start with the S&P 500 index (SPX) below. It now seems likely that even in the event of a pullback we should find significant buying support around those 2011 highs at 1370. That's about a 2 1/2 percent correction from here. Technicals improved this week with stochastics reversing higher and avoiding a confirmed turn out of overbought and with a strengthening in MACD. While we remain cautious on the macro fundamentals it is difficult to argue with this price action. From a technical standpoint most evidence points to a continuing rally for now.

The small cap Russell 200 index has been an interesting one to watch over the last few weeks with this week being no different. The improvement in technicals this week was pronounced despite a slow start and after regaining its channel it went on to move quickly back up to the upper bounds of that channel. This has been stubborn resistance and it has failed so many times now one would think it will soon resolve one way or another. Either with a convincing break through and a shot at its own 2011 highs or a failure and sharp break down to new lows of the year.
MACD flattened out from its decline this week while stochastics avoided confirming the turn out of overbought. These are just the sort of improvements we had written previously that we needed to see and this index has gone from ugly duckling to diamond in the rough in the process. A break of that channel resistance should position the RUT for outperformance under any scenario of continuing market strength.

Another potentially attractive area were market strength to continue is the semiconductor index (SOX). This index is just in great shape and with its recent successful test of 400 and subsequent strong rally could be getting set to run. Any cross over 440 should establish a nice base from which to continue the move on up to its March '11 highs at 474. Technicals also improved markedly with MACD advancing and stochastics turning around sharply.

And last up as usual we have the VIX. One way or another our VIX bottoming thesis is going to see a resolution imminently. It was a wild week for the VIX and at one point it even reached levels not seens in nearly 5 years, at 13.99 low. Indeed it finished the week not far from there at 14.47, a decline of  about 8.4%. We feel this may be the culmination of the bottoming process but it if is not then we should know that very soon. As we said, one way or another resolution is coming for this view. The white line tacked on below represents what we would probably need to see in the way of a breakout for confirmation of this. 

See you for our manic monday report! Stay safe out there!

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.

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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.

Market Madness Weekly Market Update - 3/2/12

Overall most major indices finished the week relatively unchanged with the one exception being the small cap RUT, which took a bit of a beating.

A mostly uneventful week in the large cap S&P, it ended with a slight gain of about 4.5 points (+0.33%). After an initial push up to, and then just above its 2011 high at 1370 the index essentially oscillated around that level for the rest of the week, finishing less then a point below that at 1369.72. On the weekly time frame this index and its chart remain relatively healthy. Though seemingly in need of some correction, or at least cooling off period before resuming its move. If it is to resume that move. We have some doubts.

Taking a look at the semiconductor index this week we see last week's turn in the chart is followed up by more bearish action. Though not apparent in the numbers alone, with a paltry one point loss for the week, it is clearer in the charts and indicators. A failed push up early in the week, followed by rapid deterioration and an eventual finish near the lows, left behind the bearish binary options candle formation seen in the chart below. MACD and Stochastics also continued to weaken noticeably. If bears hold the reigns come Monday and current support at 420 should be lost, look for the 400 level as the next likely support and potential rebound area. The 400 level is a fairly important level for this index right now and should be watched in the coming days and weeks.

Our index to watch of the week was, of course, the RUT. This index had been under pressure since the beginning of February and it appears it may have finally buckled under that pressure. We'll be watching closely Monday. From a technical standpoint there is absolutely nothing to like about this index in the short term. On a valuation basis? Eh. We are not overly excited about this index. The next hint of support lies around the 770 mark and we expect this level to be tested in the coming weeks should overall market weakness continue beyond last week's end.

What about volatility? The VIX was basically flat for the week after a spike up above 19 early on. Vol. measures were acting hinky last week but at least part of that may be explained by end of month options activity. Nevertheless, Market Madness is inclined to the view that we are forming a bottom here. This possibility can be seen in the chart below happening over the last six weeks. Keep an eye or two here next week as well.

In summary for this week: We feel that a cautious approach is the most prudent one for the immediate future. A comfortable spot entirely on the sidelines actually may not be such a bad idea.

Good Luck!