Last week certainly rattled everyone, as it felt like October 2008 on Friday. The psychology and emotion from all market participants really was evident in the action as fear set in the as the VIX index shot up 24%.
Many of you have been traumatized by last year's decline and are still wondering how VPM will respond to the current market action. So the question is this the beginning of the next big leg down and we are going back to a 2008 type markets? For me the answer is clearly NO! The more likely scenario is that there has been a minor top formed that will take 8 to 12 weeks to complete a correctional phase or sidewise pattern most likely lasting for most of balance of this year.
The questions for this final quarter of 2009 are many and let discuss a few. First are we on the cusp of a major decline? No. But we are likely to see a further correction, which I will discuss the parameters in below in the technical section.
Will VPM raise capital in over this period? Yes. As you recall several weeks ago, I suggested that you take profits on symbols that had reached extreme returns at or greater than one standard deviation and move to approximately 20 to 30 percent in cash. Most of you have done this, at least based upon a sampling of our user database over the past several weeks.
There a couple of things to consider when looking at the positioning of VPM in this current market environment.
Looking back at 2009 we had two concentrated buy points April 6 th and July 20 th.
On April 6 we saw most of the buys coming from VPM model 1.2. This model is more aggressive with entries and exits and usually catches the early part of a rally and then gets out closer to the top of the first leg up. This has been the case for past two weeks, as we have seen 1525 exits versus 191 new buys. So this model has begun to exit.
This week there were 1,128 sells versus only 57 buys. So we are seeing plenty of profit taking as these exits represented about 14 percent of the total number of positions held. So, many of you, are most likely increasing cash protection in your portfolios this week. It is my feeling these cash levels are appropriate for this current market phase. While it felt like it was October of '08, it isn't, so patience will be the best guide and following the process.
Most folks are still trying to equate the up move we have seen to some economic scenario, but it just doesn't work. As I have been discussing over the past 6 months, I believe what we have seen is a revaluation of failure risks in stocks and that most of the re-pricing of the market has been completed at this time.
So, it is show me the money time and it is down to economics setting the tone for the market conditions, so mostly hot and cold economic reports will perpetuate volatility and therefore the correctional phase for the next 8 to 12 weeks as a suggested earlier. While I don't see a major downside risk, there is risk in the current environment and most of your equity portfolios should be reaching 30 to 40 percent cash positions, consequently softening the downside risk, while still being able to participate in rallies when they unfold.
However, equity mutual fund and ETF positions are going to respond to major changes or trend failures. So most of these positions will remain long during this time period and it would take fair amount of additional downside before you will see the indexing styled portfolios start to sell.
The reality is that last week did not signal the end of the larger upward trend, but it did signal a sidewise corrective pattern and with the levels of volatility that we are seeing, I suspect that the index strategies will have a fair amount of volatility on a relative basis. It will be necessary to ride through period to capture the upward sequence when it resumes later in this cycle, due in this kind of pattern the rally will likely resume when you least expect it to.
Looking back as last week the volatility was insane, but after all of the action the S & P 500 finished down only 4 percent. The basic materials sector led the way with a 7.1 percent loss and the financials down 6.9 percent. Most of the talk on the street last week was about the dollar strength and the unwinding of the carry trade. With just about everybody short the dollar this action will continue to be in focus this week.
There are still the supper bears like Roubini that fell I love with the '08 crash that they can't see the differences in the current markets. There are many trying to talk the market down, but the upward momentum that was built over the past several months will be hard to dispel. Roubini may end up being right, but for now his timing appears to be off.
Also, with last week's report of Q3 GDP being up 3.5% you would have thought that Team Obama would have been screaming look what we have done, but instead you see Geithner downplaying the numbers as there still more risk in the markets. Which, may have been prudent remarks, but the reality is they cannot fundamentally change America if capitalism is working. Meanwhile, we did see the market react positive to the number on Thursday, but on Friday all bets were off as market participants were selling with both hands.
As this week unfolds the Q3 earnings season will end, with the big name reports mostly behind us. The big event this week will be the jobs report on Friday. So hang on, it will likely be a volatile week, but I expect that most of the downside was experienced last week and we should likely to see a minor recovery begin by mid-week.
Index | Started Week | Ended Week | Change | % Change | YTD % |
DJIA | 9972.18 | 9712.73 | -259.45 | -2.6 | 10.7 |
Nasdaq | 2154.47 | 2045.11 | -109.36 | -5.1 | 29.7 |
S&P 500 | 1079.60 | 1036.19 | -43.41 | -4.0 | 14.7 |
Russell 2000 | 600.86 | 562.77 | -38.09 | -6.3 | 12. |
Friday's sharp decline pushed through all of the support levels to close near the lows of the session at the 1036.18 level. The configuration suggest, that if the market cannot penetrate the 1033.40 level early in the session, then a higher close will be rendered suggesting a two to three day rally toward the 1064/1072 levels. As I discussed in Friday's comments, it was critical to close above the 1053 level to signal a bullish tone for this week. This level clearly was violated suggesting the market will unfold in a sidewise pattern for the next 8 to 12 weeks. The expected range is the 1022/1072 levels. The extreme allowed to the downside is the 1005 level and there currently is only a 20 percent probability for the market to penetrate the 1022 level.
The intermediate trends remain intact and suggest that after this corrective phase that there is a 60 percent probability for the rally to resume toward the 1158/1220 levels. While there is only a small probability for the market to close below the 1005 level, if were to occur, the market would continue toward the 960/940 levels.
Currently as of the writing of this report the futures are pointing to strong open and if the 1033.40 level holds, there will be a 60 percent probability for a higher close today.
Daily Projections |
| | Resistance |
Extreme | 1054.85 |
Resistance 3 | 1049.45 |
Resistance 2 | 1046.15* |
Resistance 1 | 1042.85 |
S & P Prev. Close | 1036.18 -29.93 |
Support 1 | 1033.40* |
Support 2 | 1030.85 |
Support 3 | 1025.40 |
Extreme | 1019.95 |
| | Support |
*key pivot points
