BEARS ARE BACK IN CONTROL -- BONDS BOUNCE OFF 200-DAY LINES AS STOCKS DROP -- GOLD BENEFITS FROM FALLING DOLLAR AND WEAK STOCK MARKET -- TAKING OUT BEAR MARKET INSURANCE -- VIX SURGES
BEARISH FORCES RETAKE THE MARKET... There have been two consistent themes that myself and Arthur Hill have been stressing in recent Market Messages. One has been that the rally from mid-March is a bear market rally. The other has been that the rally has probably ended. That dual reality was brought into sharper focus on Friday when a combination of intermarket forces sealed the fate of bullish hopes. A huge jump in the unemployment number, a big drop in the U.S. Dollar, and a record surge in oil prices sunk the stock market in a big way. Charts 1 and 2 show the Dow Industrials and the S&P 500 hitting two-month lows on heavy volume. That's after failing at their 200-day moving averages in mid-May. Rather than repeating ourselves, I refer you to last Monday's Message headlined: "It still looks like the bear market rally is ending -- Short-Term ROC lines have turned negative -- Long-Term ROC shows market still in bear market -- VIX jumps 10% -- Nasdaq fails at 200-day average for second time". All of those bearish factors are still in play. Chart 3 shows the Nasdaq ending the week back below its 200-day line after a brief pop over that major resistance line on Thursday.
Chart 1
Chart 2
Chart 3
BONDS BOUNCE OFF 200-DAY LINES ... When stock prices fall, bond prices rise. And that's just what happened on Friday. Charts 4 and 5 show the iShares Lehman TIPS Fund (TIP) and the 7-10 Treasury Bond Fund (IEF) ending the week back over their 200-day moving averages. In other words, while stocks have failed a test of their 200-day resistance lines, bonds have survived a test of their 200-day support lines.
Chart 4
Chart 5
GOLD GETS DOUBLE BOOST... Chart 6 shows the streetTracks Gold Trust (GLD) climbing the equivalent of $26 (+3%) on Friday on rising volume. The big jump in gold was a reaction to rising oil prices, a falling dollar, and a weak stock market. Gold stocks were the only group to end the day in the black. Chart 7 shows the Market Vectors Gold Miners ETF (GDX) jumping 2% on Friday on rising volume. It's RS line below the chart appears to be levelling off as well. In an environment of rising commodities and falling stock prices, gold stocks probably won't do as well as the commodity. But they may offer one of the best safe havens (along with bonds) in the current environment.
Chart 6
Chart 7
BEAR MARKET INSURANCE ... My Market Message on Friday, May 23 advised that it was time to start taking out some bear market insurance. Two of the bear funds that I suggested are shown below. Chart 8 shows the Short S&P 500 ProShares ETF (SH) closing the week at a new two-month high. The SH is a near mirror image of the S&P 500. Chart 9 shows the ProShares Ultra Short Dow 30 ETF (DXD) turning in an even stronger performance. Bear funds are not meant to be used as long-term holdings, but are an excellent way to protect against a falling market. If you can't beat the bears, why not join them.
Chart 8
Chart 9
VIX SURGES 26%... Since I started the week writing about the threat to the stock market from a rising VIX Index, it seems like an appropriate way to end it. Unfortunately, it's more bad news for stocks. We recently pointed out that the CBOE Volatility (VIX) Index was starting to bound off chart support at its October low (not shown here). On Monday, I showed its daily ROC lines turning positive. On Friday, the VIX surged nearly 5 points (+26%) to close at a two-month high. Chart 10 shows that the last peak in the VIX took place at 35 in mid-March. The subsequent two-month decline in the VIX coincided with a bear market rally in stocks. The VIX bottomed in mid-May (as the stock market peaked) and is now rising. That's usually bad news for the stock market.
Chart 10
