Assuming oil doesn’t go up 5% Friday it will finish lower for the 5th week in a row. The last time oil experienced such a losing streak wasn’t in August or September last fall, it has been at least 3 years. On another bearish note, the VIX will likely finish higher this week, making it the 8th week out of 11 it has done so. Unlike oil though, the VIX completed a similar feat in 2011, starting the first week of July and going thru August. Streaks like these have usually resulted in the market being a lot lower by the time they had ran their course, however that is not the case now as the S&P500 is still perched above 1,300.
We’re sorry to sound so negative on a day-to-day basis but we think it is important to follow the most reliable indicators when trying to time a bottom, and the VIX and oil have been those the last few years. They are saying the bottom is not in, and that rallies will be limited and should be used as opportunities to get short. That’s not to say we’re not seeing some positive signs. The positive signs we are seeing though are still being far outweighed by the bearish ones, but they deserve our attention nonetheless.
Take the dollar for example, which has had an inverse relationship with stocks over the last few years. You may notice that we haven’t been doubting this inverse relationship as much as we have the VIX or oil, and there’s a reason for that… we’re starting to see some positive divergence. At $83, the dollar is at its highest level September 2010, that same time the S&P500 was 1,100 or 16% lower than where it is now. We would consider this a net positive longer term for stocks.
Of course there could be a delayed reaction to the dollars strength, like we argued there might be to the VIX. The difference and reason we don’t believe that to be the case though is because of the huge disparity to the dollar/SPX then vs now. One might argue that that comparing SPX to the 83 dollar level back in that September 2010 period is unfair because the dollar was downtrending from its high at 88. That’s fine, because if you go to March of that same year when the dollar was at 83 on the way up to its 88 high, SPX was at 1,200 or 8.3% lower than where it is now.
The message we’re trying to deliver is that the short term trend is lower according to indicators like oil and the VIX, but the longer term bullish argument for a market that remains above its March 2009 lows by 96% is supported by positive divergences like the one we just pointed out. Noticing these potential long term positives is important in telling the difference between a market that is about to crash vs. a market that is just going thru a period of weakness after a very big and fast move higher.
Another positive? It SPX 6 months to rally 32% from its October 2011 low to its April high, compared to the 9 months it took SPX to rally 35% from its June 2010 low to its May 2011 high. In other words, the market showed the ability to move higher at a faster rate, suggesting there was some serious pent up demand on the sidelines and not a lot of supply in the market.
With SPX pulling back on lower volume this go round than it did in the fall, an even more bullish scenario could play once the next rally starts. The trickiest part of all? The bottom will come when SPX volume is the highest and the market looks the worst, but only to those who are looking at the car in front of them and not the other drivers on the road.
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- SH @ the bell 8/29/2011: Short term bottom may be in, but bulls face uphill climb
- SH @ the bell 3/5/12: Short signal in tact but be on your toes
- SH @ the bell 9/6/2011: So long relief rally, we hardly knew ya’
- SH @ the close 11/23/2011: Not much to be thankful for unless you’re short
- SH @ the bell 11/17/2011: No need to check the weather, just put your shorts on