Ian Woodward's Investing Blog

The Market and the VIX – Part 2

vix

  1. It is just two weeks ago I reminded you that the original targets I had set for the Bulls and the Bears to take note had turned out in favor of the Bulls, which suggested that the current Rally would continue for a while, until we had another decisive signal one way or another. To save you looking it up I wrote in part… 

  2. “The most exciting one is a -0.24 %B 1-Dy Chg to the Downside, which spells a Little Kahuna which would have the Bulls Prancing.  I have news for you…it hit -0.21 yesterday which is close enough for Government Work, and so the Bulls danced and pranced yesterday and they breathe a sigh of relief for now based on the INTC and IBM Earnings Reports.  You will note that the VIX is close to the Lower Bollinger Band at this point, and the bulls are looking for it to either break it further to the downside or at least stay dormant.  If it bounces from here…well you know the drill from here by now.”

  3. Two nights ago, when the % B just poked its head above the Bandwidth, I warned that this might bode well for the Bears, but it would require a Little Kahuna to the upside to clinch it, i.e. a move up from 20.24 to 21.56 in the VIX assuring a Bollinger Bands %B 1-Day Change of >0.24.  To those new to this concept, it implies a significant change in Volatility.  Likewise a change of -0.24 would be a strong signal favoring the Bulls since the VIX works opposite to the Market Indexes. In that note of April 29 when I felt that Helicopter Ben’s scheduled “Pop In “ visit would be the deciding factor t which way the wind would now blow, I wound up that note by saying…

  4. “Meanwhile, back at the ranch, the VIX has laid dormant for all of 20 trading days and for the first time poked its %B head above the Bandwidth today…a sign that could lead to the Bear’s dancing once again. What will it take for the VIX Bear followers to do cartwheels that their patience has been rewarded?  My crystal ball says an immediate bounce of the VIX from 20.24 to 21.56 will do the trick and that too will depend on what the Fed has to say tomorrow.  Otherwise anything below a reading of 20.00 will suggest more ambling sideways with a dormant VIX, and there may be hope for the Bulls to continue upwards. 

  5. In summary, we have a confluence of forces at this point in time between the Line in the Sand at 2440 on the Nasdaq, the Rotation vs Correction discussion, the VIX laying quiet, the Earnings Reports, all waiting for a nudge as to which way for the Market Indexes to go.  That nudge will likely come from Helicopter Ben popping in on us tomorrow.”

  6. I won’t prolong the suspense, but the confluence of forces has been resolved in the Bull’s favor, and the VIX handed them icing on the cake today with a Little Kahuna of a -0.29 move to the downside in the %B to take it down to 18.88!  That is manna from heaven for the Bulls, and suggests the Rally should continue for a while longer.  Some might think that this low volatility implies complacency, but beauty is in the eye of the beholder.  Recall in earlier charts I showed that the VIX was around 12ish before it took off into the sunset on four bouts of extreme volatility to over 30, but it is still a long way off where it needs to go for this to be a full blown bona-fide Bull Rally that pulls the Market out of the doldrums of the Bear Market it has been in for all of 6 months now.  The more important point is that the Bulls have “Breathing Room” for now, so enjoy it.

  7. However, do NOT count your chickens before they are hatched as tomorrow brings the Employment numbers and these days the Market moves on the latest news, i.e. yesterday’s news will be stale by then! 

chart 

  1. This was a big day for the bulls with a strong push through the 2440 barrier on the Nasdaq. The big winners in the leading stocks came from the Technology and Machine – General arenas to name a couple, including a few Chinese Silverbacks, e.g. JRJC, SOHU, PWRD, NPO, GRC, MPWR, ANSS, and SNHY as examples.  Water Pumps are big right now!  On the other hand, many of the favorite Chemical – Specialty stocks are trying to find bounces and support off their 17-dma, 50-dma or 200-dma. The jury is still out as to whether there is rotation out of this group; or whether this is normal corrective action in a group that has had a long strong rally, is fat with profits, and with the glowing Earnings Reports, they are suffering from the accompanied usual Analyst downgrades at such times.  Stocks such as POT, MOS, CF, TNH and TRA in this group need careful watching.

  2. Let’s see what tomorrow brings and then Ron will have a full review in his Weekly Movie and I will chime in if I see some clear direction.  I hope I have led you through the tulips and the minefields with the factors that influence decisions around Earnings Reports and Rotation vs Correction concerns.   

Best Regards, Ian.

 

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