BigTrends

This high reading occurred because the S&P closed up on 12 of the last 14 days, and the two declines were just 0.20 and 0.25 points. Quite an unusual win streak and one that suggests the market will be higher a month from today."

So we've had this very unusual run in the markets and many are saying we are "overbought" -- certainly we are, according to many oscillators -- but that doesn't mean we can't get more overbought.  In fact, many are waiting on healthy pullbacks to buy this market, which is making the pullbacks very shallow or not occurring at all.

Bottom line to me is, don't fight the tape and don't short an upward trend.

Well here we are again ... the CBOE Volatility Index (VIX) has dropped down to the key 17.5 level, meanwhile the S&P 500 Index (SPX) has rallied again towards the 1,150 area.

Where have we seen this scenario before?  Well, it wasn't very long ago -- in January 2010, we tested these areas (see the following chart).  Last time around, we spent several days waffling around before a fairly big market reversal occurred.  This pushed the VIX from 17.5 all the way to the upper 20s, and the SPX dropped from 1,150 to around 1,050.

So, will history repeat itself this time with a market correction ... or are we going to breakthrough with continued upside in the SPX and decline in the VIX?  I would lean to the latter choice - why do I say this?  Well, first off the second test of key levels is often the point of breakthrough ... the market has shown resilience to push back up to here.  Secondly, we've again cleared a key Fibonacci level that I've discussed before around 1,121.  Additionally, the Daily Percent R on the SPX was over 99 on Friday, which is an extremely strong reading.  Also, there certainly is skepticism in the air ... yet we had one of the better economic reports in some time last week.

While I rely on various systemized signals for our Index Options Timer trades on (SPY) (QQQQ) and (IWM), which can go in either direction at any time, I would anticipate at this point that we will test 15 on the VIX before we again approach 30.

Let's revisit the price performance of the major index ETFs for 2010 thus far.  We're looking at the S&P 500 (SPY) in green, Dow Jones Industrial Average (DIA) in red, Nasdaq 100 (QQQQ) in yellow, and Russell 2000 (IWM) in blue.

You can see on the following chart that the Russell 2000 as of today's close has separated a bit from the pack.  It is slightly up (basically even) for the calendar year thus far.  The S&P 500 and DJIA are down a bit over 1%, while the Nasdaq 100 is bringing up the rear, down around 3.5%.  This is a reversal from 2009, where the QQQQ had a much larger % gain for the year than the other 3 indices.



The Russell 2000 is designed to be a measure of small market capitalization stocks.  If you look at the Top 10 Holdings below (as of 12/31/2009), you can see that is a very diversified security, with only 3% of its assets in the Top 10 Stocks.  There are some well-known companies among its largest holdings (COMS) (ETFC) (HGSI) (TUP) among others.

Why are the QQQQs lagging this year?  Well, it comes down to the fact that 40% of its assets are basically in 4 stocks (AAPL) (GOOG) (MSFT) (QCOM).

What conclusion can one draw from this 2010 performance thus far?  Well, in general, strong performance by small-cap stocks (which tend to be considered "growth" stocks) bodes well for the markets as a whole.  Government stimulus efforts towards "small business sized" companies may play a role in this, as well.  Additionally, one should be aware that the "big 4" technology names above may NOT lead the market forward this year ... often times the previous leaders become laggards.

The CBOE Volatility Index (VIX) has long been utilized in a variety of manners for judging both investor sentiment, as well as market timing.  It can clearly shows times of both "panic" and "complacency" by the crowd, which is often late to the party and/or marks a turning point.

Take a look at this longer-term VIX Daily Chart below:




First thing that jumps out to me on this chart is the basic range on the VIX has been 20 to 30 over this time frame, with "outlier" range of 17.5 and 22.5.  Previously I have forecast that the VIX could reach as low as 15 in 2010, with 17.5 being a key level, but wasn't going to penetrate below 15 as an outlier, and I stick to that analysis.

There are several things one could see on this chart, such as short-term spikes in the VIX were often good entry points during market runup in 2009.  But there also is something interesting with the outlier range.  When the VIX consolidated in the 30/32.5 range in May/June 2009 (unable to breach above this area), it preceded a major upward leg in the S&P 500.  The VIX made lower lows through July as well, indicating the bear trend (rise in VIX) was drying up.

Recently we established a new bottom outlier range on the VIX, as we tested the 17.5/20 range repeatedly in December 2009/January 2010.  This was in effect a contrarian sell signal for the markets, and we have subsequently sold off.  Additionally, you can see that the VIX is making higher highs recently, indicating its strength (and actual volatility) has not abated.

Does this chart give me every answer as to where the market is headed?  Of course not, it is a snapshot and component of putting together a big-picture view.  But keep an eye peeled if we head back down into the 20/17.5 range (and even break down to 15), because that may well presage another sharp market correction.

The CBOE Volatility Index (VIX) moved over 6% higher today, to close at 18.66.  Taking a look at the recent VIX moves, you can see a clear pattern on these daily pops.

The last 3 VIX upward spikes lasted exactly 2 trading days, then the overall downtrend resumed.  Based on this pattern, one would anticipate that the VIX may rise to the 20 area on Thursday, only to reverse lower on Friday.

Something else to keep in mind on the Hourly S&P 500 (SPY) Chart that I follow quite closely for our BigTrends Index Options Timer program.  That chart has formed a whippy range between roughly 113 and 115 ... that range is likely to be broken soon.  If it is broken to the downside (no certainty at this point, most underlying trends are still UP for the markets), then we could see the VIX move beyond 20 , possibly moving to its Top Bands around the 22 area.

Taking a look at the 4 major index ETFs -- SPY for S&P 500, DIA for Dow Jones Industrial Average, QQQQ for Nasdaq 100, and IWM for Russell 2000 -- one can see a clear laggard thus far in 2010 ... the "Qs".

If you examine the price performance change chart covering this calendar year, you can see that the IWM (blue), SPY (green), and DIA (red) are in a similar performance range, while the QQQQ (yellow) has been an underperformer.



What would continued Nasdaq underperformance mean for the markets?  Well ... this index is certainly more geared to technology, biotech and growth than the DIA and SPY.  But the small-cap Russell 2000 (which has many growth stocks) is also outperforming the Qs, so that is a bit contradictory.

In this case it looks like the weightings of the QQQQ explain the lagging performance.  Basically 4 companies, Apple (AAPL), Google (GOOG), Microsoft (MSFT) and Qualcomm (QCOM) comprise over 32% of the holdings as of the latest data.  AAPL alone is  over a 15% weighting.  Thus, the performance of these giant technology bluechips will have a large impact on future QQQQ performance.

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.

One of the best reads I have each morning is Fred Goodman at http://www.marketmonograph.com/.  The last couple of days he put out some good stuff on the recent action in markets, specifically about the gaps.  First is from Dec 2, second is from Dec 3.

Charts and more follow, click read more