Tuesday's market action was extremely negative. A rally attempt stalled out in the afternoon, and that was bad enough considering the amount of oversold conditions that existed. But then the entire rally was erased in late-day trading, and S&P futures have continued on down another 6 points in Globex trading tonight. There is really no way to put lipstick on that pig. It was just plain ugly.
$VIX spiked up to almost 20 last Friday and then reversed back downward to nearly 17. Currently, it stands at 17.82. A spike peak reversal of that magnitude is at least a short-term buy signal for the stock market. $VIX has probed to or above the 19 level four previous times since mid-April, and a tradable stock market rally has followed each time. Will this be the case again this time, considering that there are other, more negative, indicators at work as well?
There seems to be a bit of a hangover from Friday’s action. Despite some potentially positive movement in $VIX, the market can’t seem to rally today. $VIX spiked up to nearly 20 on Friday and then fell back to almost 17. A reversal of that size is a positive factor for the stock market. In fact, $VIX was actually down on the day Friday, even though $SPX was off 13 points and the Dow was down nearly 100. That is an unusual and normally positive divergence. The fact that it hasn’t caused a market rally could be a cause for concern.
Currently, the dominant theme of the $SPX chart is its downtrend. There is now resistance at 1330, and above that, at 1345.
The equity-only put-call ratios have steadfastly remained bearish since rolling over to sell signals in mid-to-late April. As long as they are rising, that is bearish for stocks.
At the current time, breadth indicators are on sell signals.
$VIX is still in the process of rising off of its recent lows. If it closes above 19, that would be negative.
Breadth was terrible yesterday, making Wednesday a true 90% down day in terms of “stocks only” data and a 90% down volume day in NYSE terms. This is the first true 90% down day since March 10th. That usually means that one can expect a reflex rally in the next day or two, but also indicates that lower prices eventually lie ahead.
This is the second of two articles on weekly calendar spreads. In the last issue, we dealt with some of the complexities of this strategy, and promised to finish the study so that we could begin using some of the strategies in this newsletter – if they proved viable in our studies. Even though we weeded out some of the possibilities with the research presented in Part 1 of this subject (published in Volume 20, No. 9), there were still plenty of possibilities remaining.
A number of bearish signals have arisen over the past two weeks, and the market has declined -- albeit only slightly. The bears have not really capitalized on what have been favorable technicals. That doesn't mean they still can't, but the broad market has weathered the storm fairly well. The down trend line in $SPX remains intact, and there is resistance at 1330.
Equity-only put-call ratios turned decisively bearish during the last week also, as they are now rising steadily.
The settlement for the CBOE Volatility Index (VIX) May futures contract was 18.02, up by a healthy percentage from the April settlement of 14.86. Moreover, VIX itself began to rise late this week. A rising VIX is generally symptomatic of a bearish stock market, so these rises may be a warning sign to stock holders that a correction is approaching.