June 2012 – Page 2 – Andrew Thrasher

A Hard Market To Trust

Posted on June 19, 2012 by Andrew Thrasher

It feels like people are preparing their portfolios for a favorable FOMC announcement like people prepare their finances by buying lottery tickets….neither are sure things and both can be dangerous. Things just feel shaky, like a house built on unsolid ground. If Bernanke doesn’t take the stage tomorrow afternoon and give the market exactly what it’s hoping for, people will be pissed. We have experienced the Fed providing equities and commodity markets ‘juice’ since the initial easing in 2008. Those with investment accounts have benefited greatly while those with savings accounts have been taking behind the shed and beaten.

When looking at price and volume I feel agnostic. The positive moves in momentum continue to play out and there definitely are signs of a ‘healthy’ rally but I’m just not seeing the shift into higher beta areas. We’ve seen a nice rebound in the percentage of stocks trading above their 50- and 200-day moving averages, small caps, financials, and tech seem to be enjoying some spotlight again. However, it just doesn’t feel like a sustainable rally when you take out the hopes of more Fed easing.

Buying volume currently hasn’t taken out its late-May pop that the S&P 500 recently did. The ‘risk off’ sectors such as health care, consumer staples, and utilities have maintained their relative performance grip on the market, something we don’t typically see in a sustainable rally.

I’m also noticing we have already gotten a little frothy, with the McClellan Osc. breaking above 80, which hasn’t done wonders for equities the past four times this has occurred since 2010. Now this is not a large data sampling, and things don’t always repeat themselves. But as always, I’m just writing about what I see.

If Bernanke announced QE3 tomorrow, all bets are off and we could possibly see a shift back into the high-octane names we saw during previous FOMC intervention. But if Bernanke leaves those few precious sentences out of his announcement tomorrow, it appears a lot of traders will have some adjusting to do pertaining to their risk exposure. Just an observation, I have no foresight into the matter but I will be watching (like everyone else) to see what is said.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

VIX Update

Posted on June 18, 2012 by Andrew Thrasher

The volatility index dropped a little over 13% today on the first day the market had to react to the Greek election.

Back on June 6th I pulled up the chart of the VIX to look at the various levels of resistance as well as the drop in momentum. Since then the index has fallen over 25%. Below is an updated chart, where we can see the volatility index has now fallen and closed below it’s lower EMA envelope. You may remember, the close above the upper envelope was part of what made me cautious when looking at volatility back on the 6th.

The CBOE reported after the close that today set a new record for the number of contracts traded on the VIX. Typically when we get a large spike in volume like this, the directional move isn’t able to sustain itself. Will this time be different?

From the CBOE:

The CFE announced that trading volume in VIX futures on the CBOE Volatility Index (the VIX Index) set a new single-day record today of 159,744 contracts traded, eclipsing the previous record of 152,067 contracts on August 5, 2011.

The CFE (CBOE Futures Exchange) also announced that Monday, June 18 was the most active trading day in CFE history.

Today’s single-day records come on the heels of the most active trading month in CFE history. During May 2012, trading volume, both exchange-wide and in VIX futures exceeded two million contracts for the first time ever. Last month, 2,000,154 VIX futures contracts changed hands.

Through the end of May, CFE’s year-to-date trading volume stood at 7,838,752 contracts, 76 percent ahead of the 4,463,758 contracts from 2011.

Source: VIX Futures With Record Day

Will Greece Take Us Higher?

Posted on June 17, 2012 by Andrew Thrasher

It appears the New Democracy party has won the Greek election, and the initial Euro reaction has been positive. The crisis in Greece isn’t over yet, nor has the country completed its objective of creating a sustainable government. However, for the time being it appears the news is likely to be positive, as New Democracy was viewed as the party that was more pro-bailout compared to its leftist competitor. We still have the FOMC to contend with this week, providing another potential catalyst for a volatile market.

Looking at the charts, here’s what I’m noticing… The volume I was hoping to see on June 14th seems to have been provided, with a breakout (green circle) in the On Balance Volume indicator.

The percentage of stocks trading above their 50-day moving average has been steady rising in various indices. With 43% of the S&P 500 above their 50-MA, 60% of the Dow, and 38% of the Nasdaq. I’ve also noticed the Aussie dollar has been producing some nice gains, up almost 4% from its May low, which has historically been positive for U.S. equities. Bullish volume has been picking up, a positive ‘risk on’ sign.

The next point of resistance I’ll be watching will be the 50-day moving average. If the market gets favorable comments out of the FOMC, the 50-MA might not be too high of a hurdle for S&P 500 to jump. Time will tell.

The momentum and volume divergence I discussed back on June 5th when the S&P 500 had hit a (so far) bottom seems to have worked out pretty well. We’ll continue to keep on eye on Europe and the FOMC this week but it seems the storm clouds have partially cleared for the moment.

Another Way to Look At The McClellan Osc.

Posted on June 16, 2012 by Andrew Thrasher

As I’ve discussed before, one of my favorite weekly emails comes from Tom McClellan. This week he dove into a different way to analyze the McClellan Oscillator. I found this important and thought I’d pass on Tom’s wisdom…

From Chart In Focus:

There is a rule that we use when interpreting the Oscillator’s structure: The complex side is the strong side. What I am referring to is a complex structure that is entirely above or below zero, with lots of chopping up and down but without a crossing of the zero line. When you see that, the message is that whichever side of zero it is forming on is the side that is in control. So a choppy complex structure above zero means that the bulls are in charge, whereas a complex structure below zero means that the bears are in charge.

A “simple” Oscillator structure is one where you see it move across the zero line and then turn straight around without building any complexity. Such a structure says that there is no control of the market by the side on which the simple structure forms.

Source: Overbought McClellan Oscillator

Volume is the Gas That Will Get You There

Posted on June 13, 2012 by Andrew Thrasher

Gold and the S&P 500 seem to be having the same problem, momentum wants to take them higher but the volume just hasn’t been there. As the S&P 500 chart shows, the RSI has been rising while On Balance Volume (OBV) has been hitting a ceiling. You may remember I had previous looked at these two indicators on June 5th when they produced a positive divergence against the index, which took the S&P from 1278 to its current level of 1324. It also appears that the 10-day moving average (blue line) has done a decent job of providing some support over the past three days.

Like the S&P, gold seems to ‘want’ to go higher, but buying volume just keeps declining, impeding gold’s chances of appreciation. When looking at the moving averages that have come into play recently, the 50-day and the 300-day (previously discussed here), which had been a level of support, now acts as levels of resistance. Just like the S&P, gold needs to see stronger volume to the upside before it’s likely to stand a chance at breaking past these two resistance areas.