BigTrends

Overall February's ETF Trend was more bullish than January's with all three major index ETFs gaining ground. Here are the quick take-aways from February:

--In contrast to January Asian markets experienced the heavier selling in February with Japan and Taiwan leading the weakness.

--January's standout was Regional Banks and February is no different with strength spreading to all financial another month of gains (XLF, RKH, KRE)

--Energy and Commodity Based ETFs continued to show major weakness with XLE, XOP, OIH, UNG and SLV all showing losses.

--If any leaders emerge in Energy and Commodities look towards Gold and Oil as GLD and USO were a couple of the bright spots.

--With International and Global ETFs closing decisively bearish for a second month we'll be watching if they lead major US indices lower. 

--The strongest US sector is consumer discretionary led by retailers (XRT)

Let me know if you see anything else in the comments below!

ETF Heatmap (1 Month Performance) - Click to Enlarge

One of the clues to finding turns in the market is to identify the subtle clues of the market.  Price action is always king and volume is the queen.  So, we have a chart below with notes that tell you how this got started.  Institutional distribution is slow and methodical but very evident if you take a step back and look.  The blue arrow was the day after Thanksgiving..big sell day.  Oh sure, the mkt rallied from there, but the big players were taking $$$ off the table.  You didn't know it, but it happened.

Ok...now, next levels if the spx closes UNDER 1072?  We're looking at minor support at 1055, then stronger levels at 1030.  Note, this market is now correcting in time AND price, which means swift moves down to counter the long grind higher.

That's right folks, the recent selling pressure has the market average closest to the 200 day MA (exponential) since July.  As it stands now we are about 2% above the key trendline, which rests at $104.79 on the SPY.  At first glance it looks longer-term bearish, however, that's not the case if the market holds above this level of support.  Odds are that this will be a solid level for value seekers to enter the market.

The argument is two-fold, it's trend based and volatility based.  Take a look at both charts below–the S&P500 and CBOE Volatility Index both show that the market has 2-3 percent MORE to lose before finding a short-term bottom.  Of course, if we break below the 200 day for two or three days I'll update the post as it would alter the outlook in a meaningful way.

Click on the images to expand

S&P500 Daily (200 EMA)

CBOE Volatility Index

The S&P 500 Index tracking ETF (SPY) closed today right around the 115.00 level.  This is a strike price where there is fairly heavy open interest, especially in the Jan 115 Calls.  There is a possibility that we may get "pinned" right around this strike price on Expiration Friday.

However, the good news for the bullish case is that last Expiration, the SPYders got stuck at 110 on Expiration Friday.  The following week they were "freed" of that expiring open interest, and subsequently rallied for the next several trading days.  As you can see on the following chart, the December 18th Friday low was 109.28, by the next Thursday (Christmas Eve) they reached a high of 112.61.

For those interested in index option trading, we have the BigTrends Index Options Timer program, which gives specific real-time, short-term trades on the SPYders and other indices.

It sure has been a nice ride in 2009 and the start of 2010, but as the jobs number for December just came in at a negative surprise of -85,000 jobs lost last month, when many were expecting a gain, tells us the market may react negatively. Sure, you could say that means the Fed stays looser longer, but they can't get much looser than they already are. (BTW, Ben Bernanke as Time's Person of the Year tells me that yes, he stopped 2009 from being the next great depression, but by creating every form of stimulus known to man, in my book this tells us the next great surprise is MONSTER inflation in a few years).

Check out these chart of CBOE Volatility Index (VIX) vs. S&P 500 Trust (SPY) below. You can see from the BigTrends Charts (see Tools & Resources page to create these yourself), with a 20-day Acceleration Band in red and the 20-day Bollinger Band in green, we're scraping near the low end of the range for the VIX, showing much complacency. The last several times this happened, the market was headed for a correction in the coming weeks.



Not coincidentally, the SPY is right at the upper end of its range. Yes, it's hit new highs, but this is an uptrending channel here, and we're at the upper end of the channel. So be careful out there, trail your stops tightly, and prepare for some selling to come to spark renewed fear which should create the next great buying opportunity in 2-3 weeks. Looking at the bands, look for VIX to pop up near 24 at least, and the SPY to dip back down to the 110 area before we get the fear spike needed to mark a short-term bottom.

For BigTrends Insiders (click to register), we will be soon releasing our BigTrends 2010 Outlook.  This 25 page PDF report covers everything from the market to volatility to sectors to currencies and more.

Also some specific top picks and pans for 2010 are given in the report, which includes analysis from all the BigTrends Experts, including President/Founder Price Headley, Bob Lang, Moby Waller, Andrew Hart and Scott Downing.

Keep your eyes peeled for the imminent release of this free report!

There's alot of confusion about what's happening with the dollar, and most notably interest rates.  Make no mistake, the dollar is on the rise (mend?), and rates are starting to shoot up.  Treasury yields are at levels not seen in four months There is a very positive relationship there, too.  We've seen historically that rates rise when the economy starts to improve and the dollar moves with them in unison.

Note back in the late nineties, the true period of 'excess' in markets, and with valuations shooting into the stratosphere, rates were on fire, the dollar was strong (of course, much less deficit than today) as the Fed prepared to prick the bubble.  But what of stocks?  It was the best time for growth, and as wild as it may have been business was booming.  GDP growth was strong as was productivity.

We saw a similar pattern arise in 2004, and with it strong equity growth.  I suspect we're in for the same scenario, as the Fed will wait to see strong growth and potential inflation before making a move on rates.   That could come soon, or later.  The Fed Funds expects the first rate hike could come in September 2010, but that is clearly a longshot.

I suspect we'll see some sizeable market gains over the next several weeks. 

One of the most valuable indicators that I keep on hand is the NASDAQ vs S&P500 Relative Strength, it is designed to show periods of extreme growth by highlighting periods of outperformance (or under performance) in progressive tech names. 

As you know, market leaders like Apple (AAPL) and Google (GOOG) and First Solar (FSLR) are listed on the NASDAQ exchange so we look for the tech heavy index to signal periods of strong market growth.  Generally, the NASDAQ vs S&P500 RS is used as a market timing tool and it works on multiple time frames.  I review this on hourly, daily and weekly charts on a regular basis. 

Below is a chart of the weekly NASDAQ 100 (QQQQ) with the Relative Strength.  Here's a brief description of what we look for:

When the 10-day simple moving average crosses above the 21-day simple moving average of the relative strength (RS) line, this creates the bullish Setup for this indicator. It is ONLY confirmed when the Nasdaq Composite CLOSES in a future day above the Nasdaq Composite high on the day of the bullish RS crossover. This will then typically start a new uptrend phase for the markets, as the Nasdaq leads to the upside as money managers will be playing "offense" and moving more money into growth-oriented stocks. If the RS cross-over is not confirmed, then that Nasdaq Composite high is considered the top for that move, usually a peak in a trading range or an evolving downtrend.

Bottom line: Recent underperformance of the NASDAQ is supportive of a weekly outlook of broad market weakness.  Notice that the March bottom was pinned by a buy signal in the RS - since the March bottom this is the first signal (long exit) - An actual short signal would only be confirmed if we closed below weekly S&P lows (1,033.57).

We're approaching a critical time for both sides.  Yes, the market has been locked into a very narrow range for weeks now.  It seems we've been endlessly drifting around.  However, some clues are now there that may support higher prices.  We recently saw the Fed statement, sanguine about inflation and supportive of growing the economy.  They will leave 'well enough alone' for some time to come....any hint of rate hikes will be far off (late 2010) and gradual.  To be sure, the Fed will not want to ruffle any feathers.

As for the SPX, the 1100 number continues to be the magnet.  In fact, the 10 MA has been within 3 points of that number since Thanksgiving.  Now, that's what I call a tight range!  Reaching as high as 1119 and as low as 1085, the SPX has been bouncing along, taking trend traders down.  A rangebound market is good for premium sellers and stockpickers.  For the bulls to keep the momentum there has to be a move up soon.  This sticky 1100 level can be traced back to Oct 2008, where a major breakdown occurred.  So from a technical perspective...there is tugging on both sides of support and resistance.  Only time will resolve this, and it's just about time!

Remember, NOBODY holds up a flag saying it's time to sell.  There are a million reasons to sell, but only ONE reason to buy.  That being said, last week's news is something we haven't seen in quite some time.  I think traders/investors take heed.  Oh, it's not a one-off event.  You see, after such a strong rally there has to be a reason to 'take some off'.  Any excuse will do of course, and the more fearful that warning is the better.  The big question...are the other 'Dubais' out there, or is this just isolated?   Was Societe General alone?  No.   They thought Bear Stearns was isolated, too...I don't have to tell you what occurred following that disaster, although it did take time.  If this is a shift in character, it won't take long to see it (or feel it).