INTEL WEIGHS ON OVERBOUGHT NASDAQ MARKET -- SOX INDEX BACKS OFF FROM 200-DAY AVERAGE -- LOW VOLATILITY INDEXES SUGGEST OVERBOUGHT MARKET -- BONDS RALLY AS STOCKS WEAKEN
NASDAQ LEADS MARKET LOWER ... Yesterday I wrote about the Nasdaq market being up against potential chart resistance at its spring high and the possibility of at least a pullback from that level. Adding to that concern is the fact that the Nasdaq (and the rest of the market) is over-extended. The solid blue line overlaid on the Nasdaq Composite in Chart 1 is the 14-day RSI oscillator. The RSI has moved into overbought territory (over 70) for the first time since January. That's another reason why some profit-taking at these levels shouldn't come as too much of a surprise. Since the Nasdaq has been the market's strongest index since August, technology selling is causing profit-taking in the entire market. Intel is the day's biggest drag on the Nasdaq market. As a result, semiconductors are among the day's weakest groups.
Chart 1
SEMICONDUCTOR INDEX BACKS OFF FROM 200-DAY AVERAGE ... The Semiconductor (SOX) Index is helping to lead the market lower today. Intel has a lot to do with that. It's coming at a critical chart point for the chip group. Chart 2 shows the SOX backing off from a challenge of its 200-day moving average. A downturn in that key group from these levels isn't a good sign for the Nasdaq market. Last week I showed the Semiconductor Holders (SMH) clearing their 200-day line. Today's selling may put that upside breakout in jeopardy (Chart 3).
Chart 2
Chart 3
NASDAQ VOLATILITY INDEX BOUNCES OFF SUPPORT ... I've been asked several questions about the very low level of the CBOE Volatility (VIX) Index which signals a generally overbought market. Since we're talking about the Nasdaq market here, I'm using the Nasdaq Volatility Index (VXN) in Chart 4. Although the historical overbought and oversold levels for the VXN aren't as clearly defined as they are for the VIX, the general principle is the same. A peak in the VXN is usually associated with Nasdaq bottoms. Conversely, a bottom in the VXN is normally associated with Nasdaq peaks. The red bars in Chart 4 compare the trend of the VXN (red bars) over the last year to the Nasdaq Composite (green line). At the moment, the VXN is bouncing off a rising trendline drawn under the December/May lows (see arrows). Not every upturn in the VXN has been associated with a Nasdaq peak. But the one in May was. At the very least, an upturn in the VXN should be viewed as another caution sign that the Nasdaq is due for a pullback. And if the Nasdaq pulls back, the rest of the market will probably do the same.
Chart 4
THE VIX IS ALSO DANGEROUSLY LOW ... Chart 6 shows the negative correlation between the CBOE Volatility (VIX) Index (red line) and the S&P 500 (green line) for the last five years. The peak in the VIX during 2002 coincided with a major market bottom. Since then, the VIX has fallen while the S&P has continued to rise. Historically low levels in the VIX are often associated with an over-extended market. Serious market problems don't arise, however, until the VIX actually starts to rise. That hasn't happened yet. A study of the two lines shows that higher highs in the S&P have generally been associated with lower lows in the VIX. That's been the case since 2002. The fact that the VIX isn't hitting a new low this time (see flat line) may be hinting that the market advance has gotten ahead of itself.
Chart 5
VIX IS IN SUPPORT... Chart 6 shows that the CBOE Volatility (VIX) Index has declined to potential chart support formed during the spring. It appears to be forming a small "double bottom" between September and October. To signal an upturn from here, two things have to happen. First, it needs to break the declining trendline starting from the June peak. Second (and more important), it needs to clear the late September peak at 13.41. At the moment, the low level of the VIX signals an overbought market. Signs of upturn could signal a market correction. Chart 7 gives a closer look at the "double bottom" formation. The two first hurdles the VIX needs to overcome are 12.91 and 13.41.
Chart 6
Chart 7
BOND/STOCK RATIO IS ALSO IN SUPPORT ... Some of today's stock selling is coming from a downturn in industrial production and new fears of an economic slowdown. That's giving a boost to bond prices. That's coming at an opportune time. Chart 8 is a ratio of the 7-10 year T-bond ETF (IEF) divided by the S&P 500 SPDR (SPY). Bonds had been underperforming stocks heading into the spring of this year (a falling bond/stock ratio). During May, however, fears of economic slowing caused some rotation out of stocks and into bonds (a rising bond/stock ratio). Since August, the falling ratio has favored stocks over bonds. The ratio, however, has reached potential chart support at its May low and is bouncing today. That's not a whole lot to go on. But it suggests to me that new fears of economic slowing may pull some money out of an overbought stock market and back into bonds.
Chart 8
AN AFTERNOON WITH MARIA ... Just another reminder that I'll be appearing on CNBC with Maria Bartiromo around 3:00 today (eastern time) at the Nasdaq market site in New York.
