Uma análise detalhada aos US (Joe Ferrazano)
Enviado: 18/12/2002 13:46Não sei quem é este tipo, mas sempre podem pensar sobre isto... 
A very sharp rise in complacency occurred for the NASDAQ 100 on Tuesday.
http://www.joefrocks.com Dec 18, 2002 6:00:00 AM Email this article Print this article
Growth Stock Indicators
Growth Stock Timeliness - Wednesday - Untimely (NDX/COMPX technical sell signal confirmed on Wednesday 12-4 and a major rise in complacency in the NASDAQ recently)
Very Short Term (2-3 Days) - Untimely (NDX/COMPX technical sell signal confirmed on Wednesday 12-4 and a major rise in complacency in the NASDAQ recently)
Short Term (2-3 Weeks) - Untimely (likely cycle high on Monday 12-2 and NDX/COMPX technical sell signal confirmed on Wednesday 12-4)
Next Session Accuracy/Usefulness Rating - 9 out of 9. 100% (NDX/COMPX strong early on Tuesday followed by weakness which was the likely scenario. COMPX/NDX closed modestly lower)
The NASDAQ Composite (COMPX) opened modestly lower on Tuesday at 1396.33, rallied for much of the first hour of trading to the session high of 1408.16 at 10:20 am when COMPX fell sharply to 1392 at 11 am at which point it basically traded sideways the remainder of the session to close at 1392.05, -8.28 (-0.59%). The wall of worry (VXN (NASDAQ 100 Volatility Index) and QQV (QQQ Volatility Index)) didn't hold up well on Tuesday which, in concert with a modestly bearish level of the NASDAQ TRIN which closed at 1.14 (indicating modestly more activity in declining issues), suggests weakness is likely on Wednesday.
A very sharp rise in complacency occurred for the NASDAQ 100 on Tuesday, with VXN (NASDAQ 100 Volatility Index) falling -1.70 (-3.41%) to 48.14 while NDX (NASDAQ 100) fell -2.42 (-0.23%) to 1040.02 which reveals that a very sharp rise in complacency occurred for NDX because VXN fell very sharply in percentage terms despite NDX falling which portends weakness in NDX on Wednesday.
A sharp rise in complacency occurred for QQQ (NASDAQ 100 Tracking Stock, +0.08 (+0.31%) to 25.93) on Tuesday since QQQ rose much less in percentage terms than QQV (QQQ Volatility Index, -0.88 (-2.06%) to 41.80) fell (wall of worry/fear didn't hold up well) which portends weakness in QQQ on Wednesday.
If one looks at QQQ's sharp downtrending price channel, QQQ rose to the top of the channel this week, which, considering the major rise in complacency recently, suggests limited upside and potentially substantial downside on Wednesday.
The CBOE Put/Call Ratio at an elevated (at or above 0.75 but below 0.90) level of 0.76 suggests there will be weakness early on Wednesday.
HUI (AMEX Gold Bugs Index) fell 4.10% on Tuesday which was natural profit taking after the very nice recent run. Gold closed at $337.20 little changed but it fell from above $340 before 11 am which also explains some of the weakness in gold stocks on Tuesday.
Walmart (WMT) and other retailers are reporting weak holiday sales which is no surprise, and, together with a shorter than average holiday shopping season, is bad news for retail sales prospects.
The RSI (Relative Strength Index) and the stochastics for QQQ are clearly now on a sell signal and MACD (12,25,9) broke below it's moving average on Wednesday 12-4 which confirms Tuesday 12-3's sell signal. Also, down volume swamped up volume by better than 5:1 on Tuesday 12-3/Wednesday 12-4, by 5:2 on Thursday 12-5, and by overwhelming ratios of better than 13:1 on Monday 12-9 and nearly 8:1 on Friday 12-13. Declining issues led advancing issues by 11:5 on Tuesday 12-3, 19:13 on Wednesday 12-4, 20:13 on Thursday 12-5, by nearly 25:9 on Monday 12-9 and by nearly 23:10 on 12-13. Total volume for the NASDAQ was fairly high at 1,876,234,000 on Wednesday 12-4, a respectable 1.7 billion or so shares on Tuesday 12-3, but was light on Thursday 12-5 due to the major storm affecting much of the East Coast. So, the breadth/volume primary indicators and the sharp decline in the major NASDAQ averages suggests that Tuesday 12-3's technical sell signal is a meaningful one.
There were 4691 uptick blocks (10,000+ shares) versus 5089 downtick blocks on the NASDAQ during Wednesday 11-27's very sharp rally which is typical when sharp rallies occur (outflows shoot up). Want to know specifically what the smart money is doing? Warren Buffett's sidekick, Charlie Munger, just sold nearly $30 million worth of Berkshire Hathaway (BRKa) stock on November 12 (400 shares). A drop in the bucket for him but he must have still thought it was a good time to sell. Four insiders at Microsoft (MSFT), none of whom I'm familiar with, just sold similar sized chunks of MSFT ranging from $5.8 Million to $27.9 Million. Eight insiders at Qualcomm (QCOM) just sold similar sized chunks of QCOM. There are a number of other firms with similar insider selling listed in Barron's the week before last. Last week's Barron's revealed more significant insider selling at both MSFT and QCOM. This week's Barron's listed one insider (an "Affiliated Person") who sold at MSFT. The dollar volume of insider selling continues to swamp insider buying which is a major negative.
On Tuesday 12-10 VIX (OEX Volatility Index) fell very sharply (-2.80 (-8.12%) to 31.67) versus a gain in OEX of +6.50 (+1.43%) to 460.49 which was a very sharp rise in complacency for the S & P 100/value stocks since the wall of worry (VIX) collapsed as OEX (S & P 100) rallied much less in percentage terms than VIX fell. On Thursday 12-12 VIX fell sharply (-0.59 (-1.88%) to 30.81) versus a decline in OEX of -2.15 (-0.47%) to 458.54 which was a sharp rise in complacency for the S & P 100/value stocks since the wall of worry (VIX) shrank even though OEX (S & P 100) declined.
On Friday 12-13 VIX rose very sharply (+1.31 (+4.25%) to 32.12) versus a decline in OEX of -6.75 (-1.47%) to 451.81 which was a sharp rise in fear for the S & P 100/value stocks since the wall of worry (VIX) rose much more in percentage terms than OEX (S & P 100) declined. On Monday 12-16 VIX fell very sharply (-2.14 (-6.66%) to 29.98) versus a rise in OEX of +11.45 (+2.53%) to 463.26 which was a very sharp rise in complacency for the S & P 100/value stocks since the wall of worry (VIX) shrank much more in percentage terms than OEX (S & P 100) rose.
It appears the market may be heading for another major short term trading cycle/short intermediate term cycle ("VIX 50.00 rally") such as began on July 24 and October 10 when VIX rose above the extreme level of 50.00. So, I'll be looking for another important cycle low when VIX reaches 50+ (and/or if VXN reaches the extreme level of 80+) at which point I will go long QQQ in a significant way.
VXN is new as of January 2001 so not enough data exists yet to be a statistically meaningful sample size but identifying major deltas in fear (Delta VIX/VXN) and peaks in VIX/VXN can identify likely cycle highs and lows. The principle of a major rise (delta) in fear or complacency leading to major rallies/declines in the major averages is a sound one as is the degree that fear or complacency creeps into the market as it rallies/declines (how well the wall of worry holds up) portending strength (when fear creeps in) or weakness (when complacency creeps in). This chart of the percentage moves in VIX and VXN versus the S & P 500 (SPX), the Dow (DJIA), and the NASDAQ Composite (COMPX) illustrates that sound principle of market timing.
The dramatic declines (deltas) in VIX (50.48 to 26.73 on 11-22) and VXN (72 in late July to 43ish recently) recently portends dramatic weakness in the major averages in the near future (2-3 weeks) and correctly portended the current downturn.
Gold! Major breakout! New Bull Market! There is one after all. Actually gold has been in a nice Bull Market since 2001 but breaking above the very important $330 long term resistance level (at $337.20 on Tuesday) on Thursday 12-12 has major significance for gold and confirms a likely long term Bull Market. HUI (AMEX Gold Bugs Index) romped to the tune of +10.26 (+8.10%) to 136.87 on Thursday and tacked on more than 2% on high volume on both Friday & Monday which was nice follow through. Volume was very high for the gold stocks on Thursday. About five times greater than normal which is a major positive technically but not surprising given the significance of Thursday's breakout and likely new long term Bull Market for gold.
Silver has also broken out recently above the important $4.60 level. Welcome to the new Bull Market! I've been adding to my gold/silver (mostly gold) stock holdings recently and I may add a bit more since this major breakout is of course a major buy signal which explains why HUI "exploded" on very high volume. Some of the gold/silver stocks even pay a respectable dividend.
To those of you looking for "the new Bull Market" ask yourself this: Why are gold stocks doing so well with HUI rising sharply recently? Why have value stocks trended lower the past six weeks? Why did the Fed have to cut 50 basis points long after they thought they were done (shades of Japan where stocks peaked in 1989)? The major averages should have headed south in a big way right after the Fed cut by a larger than expected 50 basis points because that was a clear sign the economy had softened and profits would generally be disappointing.
In order for extreme growth stock cycle low conditions to occur (extreme fear marked by VXN (near or) above 80 as occurred during last year's intermediate term cycle lows in April and September), the major NASDAQ averages would have to fall substantially from current levels.
The CBOE Put/Call Ratio closed at an elevated (at or above 0.75 but below 0.90) level of 0.76 on Tuesday which points to weakness in the NASDAQ Composite (COMPX) early on Wednesday because it's a reliable non contrarian indicator of the next session's early action except at extremely high (at or above 1.05) or extremely low levels (at or below 0.50) where it becomes a contrarian indicator though there can be a substantial lag time before a rally (or selloff) occurs.
Wednesday 10-16's very high CBOE Put/Call Ratio of 1.25, Tuesday 9-17's very high CBOE Put/Call Ratio of 1.20 and Monday 9-30's very high CBOE Put/Call Ratio of 1.09 correctly indicated that a sharp rally was near just as it correctly portended a sharp rally previously when it rose to 1.15. It appears at a very high level at or above 1.05 (as opposed to 1.00) that the CBOE Put/Call Ratio becomes a reliable contrarian indicator. 1.05 seems to be the level which indicates fear has become extreme very short term and a sharp short term rally is near.
The NASDAQ TRIN closed at a neutral level of 1.14 (indicating modestly more activity in declining issues) on Tuesday which is modestly negative technically. A level between 0.35 and 0.80 is a bullish range for the NASDAQ TRIN because it indicates much more activity in rising issues. A NASDAQ TRIN above 1.00 indicates more activity in declining issues. A NASDAQ TRIN between 1.20 and 1.50 is a clearly bearish "red zone" range because it indicates much more activity in declining issues but not a very oversold condition. If the NASDAQ TRIN rises above 1.50 you can begin to look for a rally and if it rises above 2.00 that tends to be a reliable short term buy signal (very oversold condition). Keep in mind that capitulation has begun in earnest so COMPX generally won't rally (when it does rally in this sharp downtrend) nearly as much as under normal (non cycle low capitulation phase) circumstances.
When the CBOE Put/Call Ratio is at or above 1.05 that has been a reliable indication that a sharp rally is near (extreme of fear very short term). The best that can generally be expected (until a cycle low occurs) is a sharp one or two day wonder rally but when value stock fear/volatility became extreme (VIX above 50.00) on Thursday 10-10 (and July 24) that triggered a sharp sustained rally.
Look for gold to trend higher as the major averages are likely to decline toward a cycle low in the next few months. $330.00, a major resistance level, was broken on Thursday 12-12. After $330.00, $340.00 is another important resistance level. There might be a lot of money to be made in the gold stocks during the next few weeks but keep in mind they tend to be extremely volatile as they have been recently. The 50 basis point Fed rate cut at the November 6 FOMC is a major positive for gold stocks. The rapid growth in the money supply is a major positive for the precious metals. The Fed is in the unenviable position of having to inflate (decrease the dollar's value) in order to keep the economy afloat.
The HUI (AMEX Gold Bugs Index) stochastics flashed a buy signal (fast stochastic broke well above the slow stochastic from oversold territory) and the MACD is above it's moving average in positive territory. With HUI having fallen slightly below it's 200 day moving average in October (intermediate term cycle low) it appears to be a good time to buy both gold and silver stocks on an intermediate term basis. They corrected in terms of time and price from well above the 200 day moving average at mid year to slightly below it in October. Thursday 12-12's major breakout above $330/ounce confirms a likely long term Bull Market for gold and is a major long term buy signal as well as of course a short term buy signal. The silver stocks are acting better again but it's clearly safer to trade the gold stocks.
Recently gold volatility has been very low which correctly indicated there would be a strong move up. It appears that extremely low volatility marks gold bottoms at least on a short term basis and extremely high volatility marks important short term tops which is the opposite of what happens (at least on a short term basis) with the major averages where extremely low volatility marks tops and extremely high volatility marks bottoms on both a short and intermediate term basis (The previous extreme cycle low on 9-21-01 occurred at an extreme of volatility that saw VXN rise above 91. A sell signal occurred in March 2002 when VXN fell below 40 because it indicated that an extreme of low volatility was near. All the major averages (growth and value) began trending lower at that time though the major NASDAQ averages began trending lower in early January because growth stocks hit a cycle high at that time.).
Two extremes of fear (VIX hit the extreme level of 50+ on 7-24 and 10-10 and VXN rose to moderately high levels of 69+ and 64+ respectively on those dates) this year led to important cycle lows wether they are characterized as intermediate term (3 month+ by my definition excludes the cycle from July 24 to October 10 though the current cycle may last longer than 3 months and the wall of worry is holding up well) or major short term cycle lows. When VIX and VXN both exceeded extreme levels (of 50 & 80 respectively) on 9-21-01 (VXN hit 91+) a healthy long intermediate term (3 month+) cycle ensued which the market may still be in but it appears October 10 may have marked the start of a new intermediate term cycle as I said before (cycle high may have occurred on Monday 12-2).
Also, in April 2001 VIX reached what I consider to be a "very high" level (40-50) of 40ish, VXN reached an extreme level above 80 and a healthy long intermediate term (3 month+) cycle ensued (lasted from early April 2001 until 9-21-01 which is over five months). So, in the future, whenever either or both VIX/VXN become extreme I will call that a likely cycle low with the potential to be an intermediate term cycle low but probably at least a "major trading cycle" low. If both VIX (value stock volatility) and VXN (growth stock volatility) become extreme (as they did on 9-21-01) that will be called a likely "extreme" cycle low (growth and value stock fear both at extreme levels) with the highest likelihood of being an intermediate term cycle low (largest wall of worry).
It appears that when VXN (growth stock volatility) exceeds 80 as opposed to (just) VIX (value stock volatility) reaching 50+ a more extreme cycle low occurs and a healthier, longer intermediate term cycle is likely to occur. This makes sense since 80+ is a much more extreme level of fear/volatility than 50+ and explains why both July 24 and October 10 were "moderate" cycle lows and didn't/won't last as long as the cycle that began on 9-21-01. It's possible the market is still in the intermediate term cycle that began on 9-21-01 and that July 24 and October 10 were major "short term trading cycles" within a long intermediate term cycle that began on 9-21-01. I'll have to put more thought into that.
Value stock volatility (VIX, OEX Volatility Index, is mostly value stock volatility because the S & P 100 appears to be about 75-80% value stocks. VIX largely reflects value stock volatility) is running ahead of growth stock volatility as it did when the July 24 and October 10 cycle lows occurred with VIX at a high level (30 to 40) of 30.16 as of Tuesday's close and VXN at a fairly low level (40 to 50) of implied volatility/fear at 48.14. For VXN to be at an equivalent "high" level of implied volatility/fear it would be at or above 60 which is where it was (at 64+) when the October 10 (the second "VIX 50.00" trading cycle) "VIX 50.00" trading cycle began. Growth stocks are much more volatile than value stocks hence the differing levels for "high" implied volatility, "very high" implied volatility, etc. for VIX and VXN.
The disparity between growth and value stock implied volatility/fear is making timing the cycle low more difficult and more interesting (dramatically prolonging the cycle low process or at least preventing an extreme growth stock cycle low). I think VXN must at least reach 75 and probably near or above 80 before an extreme cycle low can occur. It reached 91+ when the last extreme cycle low on 9-21-01 occurred as I've discussed previously. It also spiked above 80 when the April 2001 cycle low occurred. We got another "VIX 50.00 rally" (moderate cycle low).
Nova Fund Assets/Ursa Fund Assets closed at 0.306 on Tuesday which is bearish (falling again indicating rising/high fear - the cycle is heading down. The very sharp spike up after October 10 was due to the "VIX 50.00" rally. The fact that this indicator jumped so dramatically so quickly was a major negative because it revealed a major degree of complacency crept into the market far too quickly and easily (just as occurred after the "VIX 50.00" rally following the July 24 low) which is a clear sign that an intermediate term cycle low has yet to occur.). Also, NASDAQ/NYSE Composite NH (New Highs)/NH+NL (New Lows) closed at 0.595 on Tuesday which is bearish (trending lower - cycle that began on October 10 is heading down.). NASDAQ/NYSE Composite NH/NH+NL is definitely a primary indicator being that it's a breadth indicator. Also, the Rydex Nova/Ursa Ratio is a primary indicator because it's a fundamental measure of wether investors are bearish (more money in the defensive Ursa Fund) or bullish (more money in the aggressive Nova Fund).
The major short term trading cycle since the July 24 low (and after the October 10 low) strongly supports my view that VXN must approach or exceed 80 as it has in recent intermediate term cycle lows (growth stock fear must become extreme) in order for a true extreme cycle low to occur.
At true extreme cycle lows fear becomes much more extreme than it did on 7-24 or 10-10 (VXN at about 70 on 7-24 and at 64 on 10-10. Spiked to 91+ at the September 21, 2001 cycle low and well above 80 when the April 2001 cycle low occurred). Also, complacency doesn't creep back into the market as quickly as it did during the recent major "VIX 50.00" rallies after 7-24 and 10-10. The rally following the July 24 low was a nice trading rally (or maybe a phantom quasi cycle) as opposed to a new intermediate term cycle which reversed course in a major way due to the enormous rise in complacency which occurred during the headfake rally (Thursday 8-8's being the most notable (VXN (NASDAQ 100 Volatility Index) plunged 9.49 points (-13.79%) to 59.35) and the fact that the cycle is still headed lower (July 24 was NOT the start of a new 3-6+ month cycle nor was October 10 (it might be a short intermediate term cycle). In other words, buckle up!
People who mechanically rely on one indicator such as VIX tend to get into trouble. This is why I look at a variety of primary indicators such as VXN, QQV, VIX, Advance/Decline Ratio, Up/Down Volume, total volume, money flow, Investor's Intelligence survey of advisor bullishness, etc. I would call the July 24 and the October 10 Bear Market lows major short term cycle lows because VIX reached an extreme level of 50+ but VXN fell well short of an extreme 80+ (it rose to about 70 on 7-24 and 64 on 10-10. Spiked to 91+ on 9-21-01). Kind of unusual occurrences.
Intermediate term cycles tend to be 3-6 months in duration in recent years. There were two intermediate term cycle lows in 2001 (April and September). However, the current intermediate term cycle began on September 21, 2001 and will probably end in the next few months.
Since there was an enormous rise in complacency during the major headfake rally after October 10 (VIX, VXN, and QQV fell dramatically and Investor's Intelligence % of advisors bullish rose to 50.60% on 11-13 from 28.40% of advisors bullish four weeks earlier) and breadth was very negative on November 7, 11, 19, 26, & December 3, 4, & 5, and overwhelmingly negative on December 9 & 13, the primary growth stock indicators portend a sharp downtrend toward a cycle low.
I see three scenarios for an extreme cycle low though this year we've had two moderate cycle lows where VIX exceeded the (S & P 100/value stock) extreme level of 50 but VXN (NDX/growth stock implied volatility/fear) only reached 69+ on 7-24 and 64+ on 10-10 which were high but far from extreme levels of implied volatility/fear for NDX/growth stocks. The most likely I still feel is the extreme cycle low such as occurred in April and September of 2001 when VXN spiked above 80 (spiked to 91+ on the 9-21 cycle low). The second is a moderate cycle low where VXN falls short of 80 with a likely retest and double bottom formation occurring. The third scenario is an unlikely crash with VXN spiking well above 100.
Breadth, a primary indicator, was negative on Tuesday with NASDAQ A/D at 10:7 in favor of declining issues and NASDAQ Up/Down Volume was in favor of down volume by 8:5. Once the cycle low occurs and a new upcycle begins breadth should turn convincingly positive during the early high fear part of the cycle. Growth (NASDAQ is mostly growth) will be more timely than value (NYSE is mostly value) but both should rise sharply during the early high fear (VXN > 60, VIX > 30) part of the cycle.
There just hasn't been the extreme fear, panic, and volatility yet that marks extreme cycle lows. VXN is at 48.14 as of Tuesday and I expect it to briefly spike above 80 and possibly even 90 the day an extreme cycle low occurs. It's likely that will be the only day that VXN spikes above 80, especially if it rises above 90. The more extreme fear becomes the more likely a "V" shaped cycle low occurs as opposed to a "W" shaped retest cycle low occurring probably as a result of a more moderate peak level of fear. VIX (value stock volatility) reaching 50+ is another likely indication that a cycle low has occurred, but is a much less extreme cycle low than when VXN (growth stock volatility) reaches 80+.
A great trading opportunity may occur in the next few months. Keep in mind that from the September 21, 2001 COMPX cycle low of 1387 to the cycle high in early January 2002 of about 2100 COMPX gained about 50% in three and a half months. So, a very nice gain will probably result if one buys QQQ near the cycle low and exits once a complacent, fairly low volatility market arises.
Capitulation has become the dominant factor now and a respectable sustained rally (more than a one or two day wonder due to a very oversold condition/jump in fear) generally will not occur until the cycle low is put in. This is a market desperately in need of an extreme cycle low (VXN reaching 80+).
One needs to keep in mind that the sentiment picture can change drastically in a few hours or even less from what I discussed using the previous close's sentiment figures. It's important to look at VXN intraday and compare it to the figure I discuss from the previous session's close. If fear rises substantially (large + Delta VXN) that portends a rally and if complacency jumps (large - Delta VXN) substantially that portends weakness. An unexpectedly large jump in fear or complacency can dramatically change the very short term sentiment picture.
It's important to remember that when capitulation becomes a major factor that fear/volatility (VXN) can rise dramatically and though that normally would portend a nice rally (as recent VXN spikes above 70 did), a lag time arises and one has to wait for the cycle low to go long QQQ once serious capitulation begins. The steep drop and quick snapback at NASDAQ cycle lows tends to form a V (a retest of the cycle low is a possibility also which is a W). I suspect that the more extreme fear/volatility becomes (VXN spiking above 90 to 91+ as it did on 9-21-01 when the last cycle low occurred) the more likely a "V" will occur and a more moderate peak level of fear/volatility (VXN spiking well above 70 but failing to reach 80) greatly increases the likelihood of a "W" pattern (retest and potential double bottom formation) cycle low occurring.
The moderate to high level of fear has a high correlation with a moderate to high level of volatility. Daily moves in COMPX on the order of 2%+ aren't surprising. Volatility (VXN) may rise sharply in the next few sessions.
I plan to go long QQQ near the cycle low for the V (possibly W) shaped recovery. Keep in mind that trading can be very risky and I am NOT recommending that anyone do this. Don't decide to do this at the drop of a hat just because it's my strategy. For example, if you buy QQQ at the wrong time you might experience a substantial downside. Buying very near the cycle low takes nerves of steel and is only for highly skilled traders due to the extreme volatility. Don't try this at home unless maybe you are a highly skilled trader or you can live with a great deal of risk. For neophytes IF you try to trade the gold stocks now you should only be using a very modest amount of risk capital and should have a risk mitigation strategy.
Happy trading, may the force be with you,
Joe F. Rocks!
Abraço.
A very sharp rise in complacency occurred for the NASDAQ 100 on Tuesday.
http://www.joefrocks.com Dec 18, 2002 6:00:00 AM Email this article Print this article
Growth Stock Indicators
Growth Stock Timeliness - Wednesday - Untimely (NDX/COMPX technical sell signal confirmed on Wednesday 12-4 and a major rise in complacency in the NASDAQ recently)
Very Short Term (2-3 Days) - Untimely (NDX/COMPX technical sell signal confirmed on Wednesday 12-4 and a major rise in complacency in the NASDAQ recently)
Short Term (2-3 Weeks) - Untimely (likely cycle high on Monday 12-2 and NDX/COMPX technical sell signal confirmed on Wednesday 12-4)
Next Session Accuracy/Usefulness Rating - 9 out of 9. 100% (NDX/COMPX strong early on Tuesday followed by weakness which was the likely scenario. COMPX/NDX closed modestly lower)
The NASDAQ Composite (COMPX) opened modestly lower on Tuesday at 1396.33, rallied for much of the first hour of trading to the session high of 1408.16 at 10:20 am when COMPX fell sharply to 1392 at 11 am at which point it basically traded sideways the remainder of the session to close at 1392.05, -8.28 (-0.59%). The wall of worry (VXN (NASDAQ 100 Volatility Index) and QQV (QQQ Volatility Index)) didn't hold up well on Tuesday which, in concert with a modestly bearish level of the NASDAQ TRIN which closed at 1.14 (indicating modestly more activity in declining issues), suggests weakness is likely on Wednesday.
A very sharp rise in complacency occurred for the NASDAQ 100 on Tuesday, with VXN (NASDAQ 100 Volatility Index) falling -1.70 (-3.41%) to 48.14 while NDX (NASDAQ 100) fell -2.42 (-0.23%) to 1040.02 which reveals that a very sharp rise in complacency occurred for NDX because VXN fell very sharply in percentage terms despite NDX falling which portends weakness in NDX on Wednesday.
A sharp rise in complacency occurred for QQQ (NASDAQ 100 Tracking Stock, +0.08 (+0.31%) to 25.93) on Tuesday since QQQ rose much less in percentage terms than QQV (QQQ Volatility Index, -0.88 (-2.06%) to 41.80) fell (wall of worry/fear didn't hold up well) which portends weakness in QQQ on Wednesday.
If one looks at QQQ's sharp downtrending price channel, QQQ rose to the top of the channel this week, which, considering the major rise in complacency recently, suggests limited upside and potentially substantial downside on Wednesday.
The CBOE Put/Call Ratio at an elevated (at or above 0.75 but below 0.90) level of 0.76 suggests there will be weakness early on Wednesday.
HUI (AMEX Gold Bugs Index) fell 4.10% on Tuesday which was natural profit taking after the very nice recent run. Gold closed at $337.20 little changed but it fell from above $340 before 11 am which also explains some of the weakness in gold stocks on Tuesday.
Walmart (WMT) and other retailers are reporting weak holiday sales which is no surprise, and, together with a shorter than average holiday shopping season, is bad news for retail sales prospects.
The RSI (Relative Strength Index) and the stochastics for QQQ are clearly now on a sell signal and MACD (12,25,9) broke below it's moving average on Wednesday 12-4 which confirms Tuesday 12-3's sell signal. Also, down volume swamped up volume by better than 5:1 on Tuesday 12-3/Wednesday 12-4, by 5:2 on Thursday 12-5, and by overwhelming ratios of better than 13:1 on Monday 12-9 and nearly 8:1 on Friday 12-13. Declining issues led advancing issues by 11:5 on Tuesday 12-3, 19:13 on Wednesday 12-4, 20:13 on Thursday 12-5, by nearly 25:9 on Monday 12-9 and by nearly 23:10 on 12-13. Total volume for the NASDAQ was fairly high at 1,876,234,000 on Wednesday 12-4, a respectable 1.7 billion or so shares on Tuesday 12-3, but was light on Thursday 12-5 due to the major storm affecting much of the East Coast. So, the breadth/volume primary indicators and the sharp decline in the major NASDAQ averages suggests that Tuesday 12-3's technical sell signal is a meaningful one.
There were 4691 uptick blocks (10,000+ shares) versus 5089 downtick blocks on the NASDAQ during Wednesday 11-27's very sharp rally which is typical when sharp rallies occur (outflows shoot up). Want to know specifically what the smart money is doing? Warren Buffett's sidekick, Charlie Munger, just sold nearly $30 million worth of Berkshire Hathaway (BRKa) stock on November 12 (400 shares). A drop in the bucket for him but he must have still thought it was a good time to sell. Four insiders at Microsoft (MSFT), none of whom I'm familiar with, just sold similar sized chunks of MSFT ranging from $5.8 Million to $27.9 Million. Eight insiders at Qualcomm (QCOM) just sold similar sized chunks of QCOM. There are a number of other firms with similar insider selling listed in Barron's the week before last. Last week's Barron's revealed more significant insider selling at both MSFT and QCOM. This week's Barron's listed one insider (an "Affiliated Person") who sold at MSFT. The dollar volume of insider selling continues to swamp insider buying which is a major negative.
On Tuesday 12-10 VIX (OEX Volatility Index) fell very sharply (-2.80 (-8.12%) to 31.67) versus a gain in OEX of +6.50 (+1.43%) to 460.49 which was a very sharp rise in complacency for the S & P 100/value stocks since the wall of worry (VIX) collapsed as OEX (S & P 100) rallied much less in percentage terms than VIX fell. On Thursday 12-12 VIX fell sharply (-0.59 (-1.88%) to 30.81) versus a decline in OEX of -2.15 (-0.47%) to 458.54 which was a sharp rise in complacency for the S & P 100/value stocks since the wall of worry (VIX) shrank even though OEX (S & P 100) declined.
On Friday 12-13 VIX rose very sharply (+1.31 (+4.25%) to 32.12) versus a decline in OEX of -6.75 (-1.47%) to 451.81 which was a sharp rise in fear for the S & P 100/value stocks since the wall of worry (VIX) rose much more in percentage terms than OEX (S & P 100) declined. On Monday 12-16 VIX fell very sharply (-2.14 (-6.66%) to 29.98) versus a rise in OEX of +11.45 (+2.53%) to 463.26 which was a very sharp rise in complacency for the S & P 100/value stocks since the wall of worry (VIX) shrank much more in percentage terms than OEX (S & P 100) rose.
It appears the market may be heading for another major short term trading cycle/short intermediate term cycle ("VIX 50.00 rally") such as began on July 24 and October 10 when VIX rose above the extreme level of 50.00. So, I'll be looking for another important cycle low when VIX reaches 50+ (and/or if VXN reaches the extreme level of 80+) at which point I will go long QQQ in a significant way.
VXN is new as of January 2001 so not enough data exists yet to be a statistically meaningful sample size but identifying major deltas in fear (Delta VIX/VXN) and peaks in VIX/VXN can identify likely cycle highs and lows. The principle of a major rise (delta) in fear or complacency leading to major rallies/declines in the major averages is a sound one as is the degree that fear or complacency creeps into the market as it rallies/declines (how well the wall of worry holds up) portending strength (when fear creeps in) or weakness (when complacency creeps in). This chart of the percentage moves in VIX and VXN versus the S & P 500 (SPX), the Dow (DJIA), and the NASDAQ Composite (COMPX) illustrates that sound principle of market timing.
The dramatic declines (deltas) in VIX (50.48 to 26.73 on 11-22) and VXN (72 in late July to 43ish recently) recently portends dramatic weakness in the major averages in the near future (2-3 weeks) and correctly portended the current downturn.
Gold! Major breakout! New Bull Market! There is one after all. Actually gold has been in a nice Bull Market since 2001 but breaking above the very important $330 long term resistance level (at $337.20 on Tuesday) on Thursday 12-12 has major significance for gold and confirms a likely long term Bull Market. HUI (AMEX Gold Bugs Index) romped to the tune of +10.26 (+8.10%) to 136.87 on Thursday and tacked on more than 2% on high volume on both Friday & Monday which was nice follow through. Volume was very high for the gold stocks on Thursday. About five times greater than normal which is a major positive technically but not surprising given the significance of Thursday's breakout and likely new long term Bull Market for gold.
Silver has also broken out recently above the important $4.60 level. Welcome to the new Bull Market! I've been adding to my gold/silver (mostly gold) stock holdings recently and I may add a bit more since this major breakout is of course a major buy signal which explains why HUI "exploded" on very high volume. Some of the gold/silver stocks even pay a respectable dividend.
To those of you looking for "the new Bull Market" ask yourself this: Why are gold stocks doing so well with HUI rising sharply recently? Why have value stocks trended lower the past six weeks? Why did the Fed have to cut 50 basis points long after they thought they were done (shades of Japan where stocks peaked in 1989)? The major averages should have headed south in a big way right after the Fed cut by a larger than expected 50 basis points because that was a clear sign the economy had softened and profits would generally be disappointing.
In order for extreme growth stock cycle low conditions to occur (extreme fear marked by VXN (near or) above 80 as occurred during last year's intermediate term cycle lows in April and September), the major NASDAQ averages would have to fall substantially from current levels.
The CBOE Put/Call Ratio closed at an elevated (at or above 0.75 but below 0.90) level of 0.76 on Tuesday which points to weakness in the NASDAQ Composite (COMPX) early on Wednesday because it's a reliable non contrarian indicator of the next session's early action except at extremely high (at or above 1.05) or extremely low levels (at or below 0.50) where it becomes a contrarian indicator though there can be a substantial lag time before a rally (or selloff) occurs.
Wednesday 10-16's very high CBOE Put/Call Ratio of 1.25, Tuesday 9-17's very high CBOE Put/Call Ratio of 1.20 and Monday 9-30's very high CBOE Put/Call Ratio of 1.09 correctly indicated that a sharp rally was near just as it correctly portended a sharp rally previously when it rose to 1.15. It appears at a very high level at or above 1.05 (as opposed to 1.00) that the CBOE Put/Call Ratio becomes a reliable contrarian indicator. 1.05 seems to be the level which indicates fear has become extreme very short term and a sharp short term rally is near.
The NASDAQ TRIN closed at a neutral level of 1.14 (indicating modestly more activity in declining issues) on Tuesday which is modestly negative technically. A level between 0.35 and 0.80 is a bullish range for the NASDAQ TRIN because it indicates much more activity in rising issues. A NASDAQ TRIN above 1.00 indicates more activity in declining issues. A NASDAQ TRIN between 1.20 and 1.50 is a clearly bearish "red zone" range because it indicates much more activity in declining issues but not a very oversold condition. If the NASDAQ TRIN rises above 1.50 you can begin to look for a rally and if it rises above 2.00 that tends to be a reliable short term buy signal (very oversold condition). Keep in mind that capitulation has begun in earnest so COMPX generally won't rally (when it does rally in this sharp downtrend) nearly as much as under normal (non cycle low capitulation phase) circumstances.
When the CBOE Put/Call Ratio is at or above 1.05 that has been a reliable indication that a sharp rally is near (extreme of fear very short term). The best that can generally be expected (until a cycle low occurs) is a sharp one or two day wonder rally but when value stock fear/volatility became extreme (VIX above 50.00) on Thursday 10-10 (and July 24) that triggered a sharp sustained rally.
Look for gold to trend higher as the major averages are likely to decline toward a cycle low in the next few months. $330.00, a major resistance level, was broken on Thursday 12-12. After $330.00, $340.00 is another important resistance level. There might be a lot of money to be made in the gold stocks during the next few weeks but keep in mind they tend to be extremely volatile as they have been recently. The 50 basis point Fed rate cut at the November 6 FOMC is a major positive for gold stocks. The rapid growth in the money supply is a major positive for the precious metals. The Fed is in the unenviable position of having to inflate (decrease the dollar's value) in order to keep the economy afloat.
The HUI (AMEX Gold Bugs Index) stochastics flashed a buy signal (fast stochastic broke well above the slow stochastic from oversold territory) and the MACD is above it's moving average in positive territory. With HUI having fallen slightly below it's 200 day moving average in October (intermediate term cycle low) it appears to be a good time to buy both gold and silver stocks on an intermediate term basis. They corrected in terms of time and price from well above the 200 day moving average at mid year to slightly below it in October. Thursday 12-12's major breakout above $330/ounce confirms a likely long term Bull Market for gold and is a major long term buy signal as well as of course a short term buy signal. The silver stocks are acting better again but it's clearly safer to trade the gold stocks.
Recently gold volatility has been very low which correctly indicated there would be a strong move up. It appears that extremely low volatility marks gold bottoms at least on a short term basis and extremely high volatility marks important short term tops which is the opposite of what happens (at least on a short term basis) with the major averages where extremely low volatility marks tops and extremely high volatility marks bottoms on both a short and intermediate term basis (The previous extreme cycle low on 9-21-01 occurred at an extreme of volatility that saw VXN rise above 91. A sell signal occurred in March 2002 when VXN fell below 40 because it indicated that an extreme of low volatility was near. All the major averages (growth and value) began trending lower at that time though the major NASDAQ averages began trending lower in early January because growth stocks hit a cycle high at that time.).
Two extremes of fear (VIX hit the extreme level of 50+ on 7-24 and 10-10 and VXN rose to moderately high levels of 69+ and 64+ respectively on those dates) this year led to important cycle lows wether they are characterized as intermediate term (3 month+ by my definition excludes the cycle from July 24 to October 10 though the current cycle may last longer than 3 months and the wall of worry is holding up well) or major short term cycle lows. When VIX and VXN both exceeded extreme levels (of 50 & 80 respectively) on 9-21-01 (VXN hit 91+) a healthy long intermediate term (3 month+) cycle ensued which the market may still be in but it appears October 10 may have marked the start of a new intermediate term cycle as I said before (cycle high may have occurred on Monday 12-2).
Also, in April 2001 VIX reached what I consider to be a "very high" level (40-50) of 40ish, VXN reached an extreme level above 80 and a healthy long intermediate term (3 month+) cycle ensued (lasted from early April 2001 until 9-21-01 which is over five months). So, in the future, whenever either or both VIX/VXN become extreme I will call that a likely cycle low with the potential to be an intermediate term cycle low but probably at least a "major trading cycle" low. If both VIX (value stock volatility) and VXN (growth stock volatility) become extreme (as they did on 9-21-01) that will be called a likely "extreme" cycle low (growth and value stock fear both at extreme levels) with the highest likelihood of being an intermediate term cycle low (largest wall of worry).
It appears that when VXN (growth stock volatility) exceeds 80 as opposed to (just) VIX (value stock volatility) reaching 50+ a more extreme cycle low occurs and a healthier, longer intermediate term cycle is likely to occur. This makes sense since 80+ is a much more extreme level of fear/volatility than 50+ and explains why both July 24 and October 10 were "moderate" cycle lows and didn't/won't last as long as the cycle that began on 9-21-01. It's possible the market is still in the intermediate term cycle that began on 9-21-01 and that July 24 and October 10 were major "short term trading cycles" within a long intermediate term cycle that began on 9-21-01. I'll have to put more thought into that.
Value stock volatility (VIX, OEX Volatility Index, is mostly value stock volatility because the S & P 100 appears to be about 75-80% value stocks. VIX largely reflects value stock volatility) is running ahead of growth stock volatility as it did when the July 24 and October 10 cycle lows occurred with VIX at a high level (30 to 40) of 30.16 as of Tuesday's close and VXN at a fairly low level (40 to 50) of implied volatility/fear at 48.14. For VXN to be at an equivalent "high" level of implied volatility/fear it would be at or above 60 which is where it was (at 64+) when the October 10 (the second "VIX 50.00" trading cycle) "VIX 50.00" trading cycle began. Growth stocks are much more volatile than value stocks hence the differing levels for "high" implied volatility, "very high" implied volatility, etc. for VIX and VXN.
The disparity between growth and value stock implied volatility/fear is making timing the cycle low more difficult and more interesting (dramatically prolonging the cycle low process or at least preventing an extreme growth stock cycle low). I think VXN must at least reach 75 and probably near or above 80 before an extreme cycle low can occur. It reached 91+ when the last extreme cycle low on 9-21-01 occurred as I've discussed previously. It also spiked above 80 when the April 2001 cycle low occurred. We got another "VIX 50.00 rally" (moderate cycle low).
Nova Fund Assets/Ursa Fund Assets closed at 0.306 on Tuesday which is bearish (falling again indicating rising/high fear - the cycle is heading down. The very sharp spike up after October 10 was due to the "VIX 50.00" rally. The fact that this indicator jumped so dramatically so quickly was a major negative because it revealed a major degree of complacency crept into the market far too quickly and easily (just as occurred after the "VIX 50.00" rally following the July 24 low) which is a clear sign that an intermediate term cycle low has yet to occur.). Also, NASDAQ/NYSE Composite NH (New Highs)/NH+NL (New Lows) closed at 0.595 on Tuesday which is bearish (trending lower - cycle that began on October 10 is heading down.). NASDAQ/NYSE Composite NH/NH+NL is definitely a primary indicator being that it's a breadth indicator. Also, the Rydex Nova/Ursa Ratio is a primary indicator because it's a fundamental measure of wether investors are bearish (more money in the defensive Ursa Fund) or bullish (more money in the aggressive Nova Fund).
The major short term trading cycle since the July 24 low (and after the October 10 low) strongly supports my view that VXN must approach or exceed 80 as it has in recent intermediate term cycle lows (growth stock fear must become extreme) in order for a true extreme cycle low to occur.
At true extreme cycle lows fear becomes much more extreme than it did on 7-24 or 10-10 (VXN at about 70 on 7-24 and at 64 on 10-10. Spiked to 91+ at the September 21, 2001 cycle low and well above 80 when the April 2001 cycle low occurred). Also, complacency doesn't creep back into the market as quickly as it did during the recent major "VIX 50.00" rallies after 7-24 and 10-10. The rally following the July 24 low was a nice trading rally (or maybe a phantom quasi cycle) as opposed to a new intermediate term cycle which reversed course in a major way due to the enormous rise in complacency which occurred during the headfake rally (Thursday 8-8's being the most notable (VXN (NASDAQ 100 Volatility Index) plunged 9.49 points (-13.79%) to 59.35) and the fact that the cycle is still headed lower (July 24 was NOT the start of a new 3-6+ month cycle nor was October 10 (it might be a short intermediate term cycle). In other words, buckle up!
People who mechanically rely on one indicator such as VIX tend to get into trouble. This is why I look at a variety of primary indicators such as VXN, QQV, VIX, Advance/Decline Ratio, Up/Down Volume, total volume, money flow, Investor's Intelligence survey of advisor bullishness, etc. I would call the July 24 and the October 10 Bear Market lows major short term cycle lows because VIX reached an extreme level of 50+ but VXN fell well short of an extreme 80+ (it rose to about 70 on 7-24 and 64 on 10-10. Spiked to 91+ on 9-21-01). Kind of unusual occurrences.
Intermediate term cycles tend to be 3-6 months in duration in recent years. There were two intermediate term cycle lows in 2001 (April and September). However, the current intermediate term cycle began on September 21, 2001 and will probably end in the next few months.
Since there was an enormous rise in complacency during the major headfake rally after October 10 (VIX, VXN, and QQV fell dramatically and Investor's Intelligence % of advisors bullish rose to 50.60% on 11-13 from 28.40% of advisors bullish four weeks earlier) and breadth was very negative on November 7, 11, 19, 26, & December 3, 4, & 5, and overwhelmingly negative on December 9 & 13, the primary growth stock indicators portend a sharp downtrend toward a cycle low.
I see three scenarios for an extreme cycle low though this year we've had two moderate cycle lows where VIX exceeded the (S & P 100/value stock) extreme level of 50 but VXN (NDX/growth stock implied volatility/fear) only reached 69+ on 7-24 and 64+ on 10-10 which were high but far from extreme levels of implied volatility/fear for NDX/growth stocks. The most likely I still feel is the extreme cycle low such as occurred in April and September of 2001 when VXN spiked above 80 (spiked to 91+ on the 9-21 cycle low). The second is a moderate cycle low where VXN falls short of 80 with a likely retest and double bottom formation occurring. The third scenario is an unlikely crash with VXN spiking well above 100.
Breadth, a primary indicator, was negative on Tuesday with NASDAQ A/D at 10:7 in favor of declining issues and NASDAQ Up/Down Volume was in favor of down volume by 8:5. Once the cycle low occurs and a new upcycle begins breadth should turn convincingly positive during the early high fear part of the cycle. Growth (NASDAQ is mostly growth) will be more timely than value (NYSE is mostly value) but both should rise sharply during the early high fear (VXN > 60, VIX > 30) part of the cycle.
There just hasn't been the extreme fear, panic, and volatility yet that marks extreme cycle lows. VXN is at 48.14 as of Tuesday and I expect it to briefly spike above 80 and possibly even 90 the day an extreme cycle low occurs. It's likely that will be the only day that VXN spikes above 80, especially if it rises above 90. The more extreme fear becomes the more likely a "V" shaped cycle low occurs as opposed to a "W" shaped retest cycle low occurring probably as a result of a more moderate peak level of fear. VIX (value stock volatility) reaching 50+ is another likely indication that a cycle low has occurred, but is a much less extreme cycle low than when VXN (growth stock volatility) reaches 80+.
A great trading opportunity may occur in the next few months. Keep in mind that from the September 21, 2001 COMPX cycle low of 1387 to the cycle high in early January 2002 of about 2100 COMPX gained about 50% in three and a half months. So, a very nice gain will probably result if one buys QQQ near the cycle low and exits once a complacent, fairly low volatility market arises.
Capitulation has become the dominant factor now and a respectable sustained rally (more than a one or two day wonder due to a very oversold condition/jump in fear) generally will not occur until the cycle low is put in. This is a market desperately in need of an extreme cycle low (VXN reaching 80+).
One needs to keep in mind that the sentiment picture can change drastically in a few hours or even less from what I discussed using the previous close's sentiment figures. It's important to look at VXN intraday and compare it to the figure I discuss from the previous session's close. If fear rises substantially (large + Delta VXN) that portends a rally and if complacency jumps (large - Delta VXN) substantially that portends weakness. An unexpectedly large jump in fear or complacency can dramatically change the very short term sentiment picture.
It's important to remember that when capitulation becomes a major factor that fear/volatility (VXN) can rise dramatically and though that normally would portend a nice rally (as recent VXN spikes above 70 did), a lag time arises and one has to wait for the cycle low to go long QQQ once serious capitulation begins. The steep drop and quick snapback at NASDAQ cycle lows tends to form a V (a retest of the cycle low is a possibility also which is a W). I suspect that the more extreme fear/volatility becomes (VXN spiking above 90 to 91+ as it did on 9-21-01 when the last cycle low occurred) the more likely a "V" will occur and a more moderate peak level of fear/volatility (VXN spiking well above 70 but failing to reach 80) greatly increases the likelihood of a "W" pattern (retest and potential double bottom formation) cycle low occurring.
The moderate to high level of fear has a high correlation with a moderate to high level of volatility. Daily moves in COMPX on the order of 2%+ aren't surprising. Volatility (VXN) may rise sharply in the next few sessions.
I plan to go long QQQ near the cycle low for the V (possibly W) shaped recovery. Keep in mind that trading can be very risky and I am NOT recommending that anyone do this. Don't decide to do this at the drop of a hat just because it's my strategy. For example, if you buy QQQ at the wrong time you might experience a substantial downside. Buying very near the cycle low takes nerves of steel and is only for highly skilled traders due to the extreme volatility. Don't try this at home unless maybe you are a highly skilled trader or you can live with a great deal of risk. For neophytes IF you try to trade the gold stocks now you should only be using a very modest amount of risk capital and should have a risk mitigation strategy.
Happy trading, may the force be with you,
Joe F. Rocks!
Abraço.