As expected, the market finished last week unchanged. The buy side is trying to build on June-July double bottom and move S&P above 1290 level. Sentiment indicators as well as positive chart patterns are working in their favor for the time being. Meanwhile the sell side has many advantages in terms of inability of small cap stocks as well as NASDAQ to participate in DOW-led rally. No matter how we look at it, it is impossible to find a rally any time in history, which succeeded without NASDAQ and Russell participation. While the advance may not be over, there are more and more indications that the double bottom will be broken within the next two months. We believe that Middle East Conflicts, which include current situation in Lebanon and probable civil war in Iraq, are not priced in yet. These developments will serve as a trigger for the decline in stocks and rise in Gold in weeks to come.
Volatility indexes (VIX in particular) are testing the low of the consolidation pattern. Our indicators strongly suggest that Volatility is about to advance, which is normally bearish for the stock market.
VIX daily:
Supply-Demand indicators has not changed much from July lows, suggesting that there is no rush into equities, and completely no interest in high beta stocks. Open Interest on S&P futures has been declining during the latest rally, which is also a bearish indication. The market may hold and trade around current levels for a while longer, but we view it as an opportunity to build short positions with a three month time horizon.
Dennis Leontyev
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