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Solid Momentum or Crazy Buying? - Weekly Market Outlook by Price Headley

by contributor on 02-23-2012 02:48 PM - last edited on 02-23-2012 02:54 PM by Administrator

The scales could have tipped either way last week, but Thursday's encouraging news on the jobs front (against a backdrop of a potential resolution to the European crisis) sparked a buying effort that cemented last week's gains.

 

The rally now stands at 12.9% since the December 19th close, which is getting to
'uncomfortable' proportions.  Yet, as Keynes said, "The market can stay irrational longer than you can stay solvent."  Bullish momentum aside, how much gas is really left in the market's tank?  We'll poke and prod things below, right after a look at the key economic data.

 

Economic Calendar


Last week was loaded with economic numbers, so well just hit the highlights. In order of appearance...

* Retail sales (with cars) was weaker than expected, up 0.4%.  Retail sales excluding autos from the tally was better than expected, up 0.7%.

 

* Industrial productivity and capacity utilization - two 'biggies' for the market's long-term trend - weren't encouraging.  Production for January was flat with December, while capacity utilization actually fell back to 78.5%.  It's too soon to be alarmed yet, but this is something we want to keep tabs on.

 

* Unemployment claims continue to drop.... a lot.  New claims fell to a multi-year low of 348K, while ongoing claims fell to 3.42 million, which was also a new multi-year low.

 

* The construction industry is busier too.  Housing starts jumped from an annualized rate of 689K for December to 699K. Issued permits were up from 671K to 676K in January.

 

* Inflation is under control.  Producer inflation was only up 0.1% last month, though on a core basis (minus food and energy) was up 0.4% last month.  For consumers, prices rose 0.2% on a core as well as a non-core basis.  The annualized inflation rate now stands at 2.93%.

 

Economic Calendar


 

The coming week is clearly going to be a light one, though an important one for the real estate market.  Existing home sales will be unveiled Wednesday.  Look for more of the same... an annualized rate of 4.63 million.  New home sales will be announced open Friday, and the pros are looking for the rate to increase to 315K.

S&P 500

Usually we go with a daily chart of the S&P 500 Index (SPX) (SPY) below, and then follow with a weekly chart.  This week we want to paint the bigger picture first with a weekly chart, and then drill into the daily.

 

The fact is, though the S&P 500 is feeling overbought;  it hasn't yet reached its absolute current ceiling.  That's around 1370, where the upper 20-week Bollinger band (gray) as well as peak from last May was.  Versus Friday's close of 1361.23, there's still a little more room for the bulls to move.  The question is, will they use it?

 

S&P 500 - Weekly



 

So does the daily chart show us anything different?  Not really - the market's still trapped somewhere between 'solid momentum' and 'this is crazy'.


For the S&P 500, that means the index is still above the 10-day (red) and 20-day (blue) moving averages, and below the upper 20-day (gray) and 50-day (orange) Bollinger bands, moving at a well-paced (read 'sustainable') clip.  It seems hard to believe, but as long the S&P 500 can stay in the zone without overheating or breaking down, this bullish trend can stay alive.

 

Take a look, but be sure to keep reading for some thoughts on the CBOE Volatility Index (VIX) (VXX) (VXZ).

 

SPX & VIX - Daily



 

Our concern as of last Friday (two Fridays ago) was that the VIX - for the first time in a long time - was pressing into its upper 20-day Bollinger band (orange) as well as the VIX's 50-day moving average line (purple).

An encounter with the upper Bollinger usually means a downside reversal from the VIX is on the way, and is therefore bullish for stocks.  The same goes for meeting resistance at the 50-day moving average line. Y et, it wasn't clear if the move up and into the moving average line and Bollinger band this time around was going to result in a downside move from the VIX, or if this was just the beginning of a move above the 50-day moving average line and upper 20-day band line.  If it was the latter, then this was the beginning of a bearish move for the S&P 500... provided the SPX's 20-day moving average line also (finally) at 1335.6 also failed to act as a floor.

Well, we're still no closer to an answer.

 

Though the VIX did peel back from those key ceilings on Monday of last week, both were tested again on Wednesday and Thursday.  And once again, both lines sent the VIX lower again, and the market rallied accordingly. 

 

Here's the thing - last week's effort from the VIX to punch through the upper Bollinger band line and/or its 50-day average was the second time in the last several weeks we saw such fear and worry.  The bulls ARE getting nervous here in a way they haven't since November.  It hasn't been a problem (bearish) yet, but the market's complexion IS changing even if the momentum hasn't yet.

 

We still ultimately need to see the VIX make a couple of closes above the 21.00 area (above its recent resistance levels) before we can fully say a pullback is underway.  But, we're closer to that move than most traders may realize.

 

Trade Well,

Price Headley
BigTrends.com 

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About the Author
  • Mr. Bittman is the author of two books, Options for the Stock Investor, (McGraw-Hill, 1996), and Trading Index Options (McGraw-Hill, 1998). He teaches courses for public and institutional investors, and he has presented several custom courses throughout the U.S., Europe, South America and Southeast Asia. In 1980 Mr. Bittman began his trading career as an equity options market maker at the Chicago Board Options Exchange. From 1983 to 1993, he was a Commodity Options Member of the Chicago Board of Trade where he traded options on financial futures and agricultural futures. Mr. Bittman received a BA, magna cum laude, from Amherst College in 1972 and an MBA from Harvard University in 1974. In addition to his responsibilities at The Options Institute, Mr. Bittman is also a member of the faculty of The Illinois Institute of Technology, where he teaches in the masters level Financial Markets and Trading Program.
  • Mr. Kearney began his long association with the CBOE when he became an independent Market Maker in early 1981. Mr. Kearney traded options full time on the trading floor until 1992 and periodically thereafter until 1996. In early 1992 he became a founding partner and Registered Options Principal of a brokerage firm based in Chicago, a member firm of the CBOE. Mr. Kearney’s responsibilities included development and implementation of hedging and trading strategies using listed options for their institutional clients as well as their retail investors. Mr. Kearney is the co-author of Understanding LEAPS®, published by McGraw-Hill, September 2002. He has been a regular contributor to many news services including Reuters, Derivatives Week, BARRON’S, CNBC, Bloomberg, Group W, The CBS Radio Network, FORTUNE, Ticker Magazine, Stock Futures and Options, BBC TV and Radio, NPR, and others. Mr. Kearney served on various committees at the CBOE, including the Arbitration Committee from 1984 to 1996. Prior to joining the CBOE Mr. Kearney was a marketing director for NCR Corporation. Mr. Kearney is a graduate of St. Mary’s University (MN), BS, 1971, and pursued his MBA at Lake Forest Graduate School of Management. In 2006 he completed a 3-year SII/SIA program at the Wharton School of the University of Pennsylvania.
  • Peter B. Lusk is an instructor at the Options Institute, the educational arm of the Chicago Board Options Exchange. He teaches option courses for public and institutional traders and has contributed educational type articles to various financial publications. Peter has spoken to thousands of investors across North America the past few years including over 200 webinars for the CBOE and member firms on trading options. He can also be seen each week on CBOE-TV with his show, Strategy of the Week. In addition to his responsibilities at the Options Institute, Peter serves as an Instructor for the Options Industry Council – an organization representing the options industry in the U.S. Prior to working at the Options Institute, Peter was a highly successful market maker for many years on the floor of the CBOE trading equity options. He was also involved in options training for new market makers at Lakota Trading in Chicago. As a professional trader, Peter enjoys sharing his knowledge of proven option strategies and risk management at the Options Institute.
  • Russell Rhoads, CFA, is an instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and Millenium Management. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies. Since joining the Options Institute he authored Option Spread Trading: A Comprehensive Guide to Strategies and Tactics which was released in January 2011 and recently finished work on Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange Traded Notes which was published in August 2011. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois – Chicago and acts as an instructor for the Options Industry Council. He is a double graduate of the University of Memphis with a BBA ('92) and an MS ('94) in Finance and also received a Master's Certificate in Financial Engineering from the Illinois Institute of Technology in 2003.
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