VERY LITTLE HAS CHANGED SINCE LAST UPDATE -- FED LEAVES RATES UNCHANGED -- MARKET SHOWS SLIGHT TILT TOWARD DEFENSIVE SHARES -- UTILITIES ARE STRONGER THAN TRANSPORTS
VIX STILL HASN'T GIVEN A TRADING SIGNAL ... At the start of November, I wrote about the potential threat to the market of an upturn in the CBOE Volatility (VIX) Index. At the time, I explained that the VIX had to break through some overhead resistance levels to cause problems for the stock market. I identified the late September peak at 13.41 as the first barrier that the VIX needed to overcome. An accompaning point & figure chart (using a .50 point box) put the VIX breakout signal at 13.50. On November 1, I wrote that "the VIX would have to hit 13.50 to give a VIX buy signal and a sell signal in the market". Neither has happened. However, the breakout numbers have changed. To turn up from here, the VIX would have to close over its December peak at 12.68. The p&f boxes in Chart 2 put the upside breakout point for the VIX at 13. A low VIX in itself isn't necessarily bearish for stocks. A rising VIX usually is. But the VIX hasn't started to rise.
Chart 1
Chart 2
UPDATE ON NASDAQ ADX AND DI LINES... Another reader asked for an update on the recent "short-term" sell signal I suggested in the Nasdaq based on the downturn in the ADX line. Actually, it's gotten even weaker. The black line in Chart 3 is the Average Directional Index (ADX) line. As long as the ADX line is rising, the uptrend is intact. A downturn in the ADX line (usually from above the 40 level) usually signals the onset of a consolidation or correction. Since the ADX peaked a couple of weeks back, the Nasdaq has trended sideways. More troubling is the fact that the red (-DI line) is in danger of crossing over the green (+DI line) for the first time in several months. [The green line represents buying pressure and the red line selling pressure]. A decisive crossing by the red line over the green could signal a test of the 50-day moving average and the late November low at 2390. As long as the Nasdaq stays over the 2390 level, however, its recent action will look more like a consolidation than a top.
Chart 3
MODEST FED EFFECT ... The Fed left short-term rates unchanged today as nearly everyone expected. The only change it made to its wording was the addition of the word "substantial" to the housing slowdown. That didn't have a big impact on the various markets. But there was a minor impact. The hint of more weakness in the housing market pushed bond yields lower and caused some minor selling in the dollar. That gave a modest boost to precious metals which were trading lower earlier in the day. There was also a slight tilt toward more defensive stocks and some selling in economically-sensitive shares. Which brings me to a final question asked by one of our readers. If the market were to enter a downside correction, where would money rotate to. In any kind of a market correction, money usually flows toward consumer staples, healthcare, utilities, and financials. Interestingly, those four groups were market leaders today and for the last week. The weakest groups over the week have been technology, consumer discretionary, energy, and basic materials. [The latter group was pulled down today by a slide in steelmakers as shown in Charts 4 and 5]. That's also consistent with some economic slowing. Two other areas where the market has taken a slightly more defensive turn is the recent action in the transports and the utilities.
Chart 4
Chart 5
UTILITIES ARE GAINING WHILE THE TRANSPORTS AREN'T ... I often compare these two groups to try to discern how confident the market really is. The utilities are stock proxies for the bond market. They do well when bond prices are rising (and yields are falling) as they are now. Utilities are also a defensive market group. The transports, by contrast, are more dependent on the strength of the economy. I point this out today because the Dow Transports fell below their 50-day moving average for the first time in three months. Their falling relative strength line shows them lagging behind the Dow Industrials. The moral is simple. Utilities do better than the tranports in a market that expects some economic slowing over the next six months.
Chart 6
Chart 7
