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Stockhaven’s market take 12/20/12

Are you a bear? If you are you should be ashamed of yourself. The markets were primed for a further move lower today given the end of day sell off yesterday but that didn’t materialize. The Dow was never down more than 40 points at its lows, even as the VIX continued to advance. After trading near the break even line for much of the morning, the indexes broke thru in afternoon trading and actually had quite a nice day.

  • Banks continue to shine — XLF hit another fresh 52 week high and closed near the highs of the day
  • More gains for the VIX — The VIX followed thru on yesterday’s advance with another increase today, though not as dramatic

For those of you trying to figure out how the market keeps trending higher while key stocks like AAPL & HD trade lower for the month, you need not look no further than the banks. XLF has been on steroids recently and again closed at its highest level since April 2011. As a result, BAC, GS, JPM, & C all hit new 52 week highs. As long as the banks are trading like this, those looking for a serious correction are going to keep doing just that… waiting. What might signal the bank trade is off? Well XLF has only had one 3 day losing streak since the middle of October so keep an eye out for one of those.

One of the things that continues to confuse me about this market is the action in the VIX. The VIX generally has an inverse correlation with the SPX, when it rises, SPX tends to fall. This correlation becomes far less accurate when the VIX is between 14-16, but above 16 it is historically a true inverse correlation. So you might be able to understand why I’m confused about the 7%+ rally in the VIX this week while SPX has marched higher as well.

Clearly someone(s) are setting up for a big drop in the indexes, as there is no other reason expected volatility (which is what the VIX is a measure of) should be so high. So I have a couple of things I am taking away from this:

1) The door is now open for a serious spike higher in the immediate term, one that would likely come with the VIX moving back towards 16
2) We could be on the verge of a 200-300 point down day very very soon

Which scenario will play out? If December is your indicator, it will likely be option #1, as we have seen this on two occasions so far where the VIX advances for no apparent reason (i.e. not as a result of the markets moving lower) only to come back down on its own, aiding a rally higher. However, I must note that no previous advances in the VIX so far this month have seen consecutive green closes above 17, and that is what today’s close at 17.67 brought along with it.

Bottom line, with volatility elevated like this now is a good time to be placing bets that a pretty big move (100-200 point day) is coming in the next 1-3 trading days. As for which side of fence you find yourself on, you may choose to be bullish based on the banks, or you could cite the continued weakness in market leader AAPL as a reason to be bearish. Whatever your reasoning, the key is knowing when the time is right to raise your expectations of a big move, and the VIX is signaling that that time is now.

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