Some volatility has appeared in the market over the last week, although
you'd never know it by looking at the volatility index ($VIX). First, the
market went down at the end of last week -- rather swiftly -- but then
recovered with a big up day on Tuesday. After a waiting period to see
what the Fed would do (they the same old thing they always do -- raised
rates by 1/4%), the media was quick to point out that the market declined
Thursday afternoon because it didn't like what the Fed had to say, but we
offer an alternative viewpoint: the market was just "on hold" for the last
couple of days, waiting for the Fed announcement to get out of the way
(just in case there was a surprise, which there wasn't); then it resumed its
natural course, which was to decline. Despite all of this movement, or
perhaps because of it, there are mixed signals.
The major indices are not in agreement. The Dow, QQQQ, and
$OEX all broke down below support by the end of last week and have
not been able to recover above that level -- even with Tuesday's rally.
However, perhaps the most important one -- $SPX -- has not joined its
compatriots. It remains above support at 1190 (Figure 1). As long as
that support holds, the bears won't be able to mount much of anything.
However, if $SPX closes below 1190, that will usher in another round
of selling and could augur for a lengthier decline ahead.
The selloff at the end of last week came just after the equity-only
put-call ratios generated sell signals. These are usually longer-term
averages (because they are 21-day average) and thus are more of an
intermediate-term indicator, rather than an exact timing indicator.
However, the last two times the market has reversed direction (the
bottom in May and the top last week), these put-call ratios turned to a
new signal on the exact day. Regardless, they are both on sell signals
now and haven't really shown any signs that they might reverse to the
bullish side.
Market breadth was ugly in last week's decline. However, this week,
that has changed. Breadth has been more positive than the market. For
example, when the market was down 100 points today (the Dow,
anyway), NYSE breadth was barely negative. With breadth acting more
positive in the last few days, we'd just grade this indicators as "neutral."
Finally, there is volatility. $VIX barely moved when the market
dropped last week. From valley to peak, it rose a mere 1.5 points. Then
it backed off. It is about 12 now, and that is still very low. We generally
look for $VIX to be rising to confirm a market sell signal. Otherwise,
any selling in the market is more of a correction than a sell signal. To be
specific, if $VIX rises above 14, we'd classify it as being bearish. But
as long as it's languishing down at these levels, it isn't offering any
confirmation for the bears.
