JUMP IN VIX COINCIDES WITH STOCK PULLBACK -- STOCK INDEXES ARE THREATENING THEIR 20-DAY AVERAGES -- CONSUMER STAPLES OFFER DIVIDENDS AND SOME SAFETY -- WAL-MART HITS NEW FIFTY-TWO WEEK HIGH
VIX STARTS TO BOUNCE ... Two Thursday's ago (January 6), I showed the CBOE Volatility (VIX) Index having reached a potential support level at last spring's low near 15, and warned that a bounce off that level could cause a stock market pullback. That's because the VIX and stocks usually trend in opposite directions as shown in Chart 1. The reason I'm coming back to the VIX today is because it's climbing 8% and beginning to look like it's short-term trend is turning up. Chart 2 shows the VIX action more closely. After bouncing twice off support near 15 since mid-December, the VIX is challenging its early January intra-day high at 18.63. A close over that initial resistance barrier would turn its short-term trend higher and could signal an overdue pullback in the stock market.
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Chart 1
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Chart 2
S&P 500 IS RIPE FOR A PULLBACK ... Chart 2 shows the S&P 500 uptrend starting to weaken a bit. Of concern are the two surrounding indicators. The 14-day RSI (top of chart) is dropping from overbought territory over 70 for the second time since the start of November. Daily MACD lines (below chart) are starting to roll over to the downside for the first time in two months as well. The inability of the MACD lines to exceed their November highs also shows loss of upside momentum. A normal pullback would bring the SPX back to its (blue) 50-day average. Chart 4 applies Bollinger bands to the SPX, and shows it threatening its (dashed) 20-day average. A close below that initial support line would signal a likely drop to its lower band which is just above the 50-day line. Chart 5 shows the Nasdaq Composite already slipping below its 20-day line. That's not a good sign since the Nasdaq had been leading the market higher. The fact that other recent leaders like small caps, materials, and tranports are leading the decline is another sign that the market is weakening.
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Chart 3
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Chart 4
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Chart 5
CONSUMER STAPLES ARE HOLDING UP ... Last Thursday's message suggested that conservative investors might consider dividend-paying stocks in the current environment. I focused that message on a couple of dividend-paying ETFs and the Vanguard Dividend Appreciation ETF (VIG) in particular. Dividend-paying stocks, ETFs, or mutual funds offer a more conservative way to commit funds to the market (especially for former bond holders). Dividend paying stocks tend to lag the market in an uptrend, but hold up better when the market weakens. The biggest sector weighting in the VIG is consumer staples. That also makes sense since staples are a defensive market sector (along with healthcare and utilities). Which brings us to Chart 6 which shows the Consumer Staples SPDR (XLP) rising today in the face of a weak market. [Utilities are the only other sector in the black today]. The relative strength ratio (below chart) has been falling since August when the market started rising. That's perfectly normal since staples usually lag the market during an uptrend. It also makes since that they should hold up better during a market correction. The fact that a lot of consumer staple stocks pay dividends is an added attraction for group.
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Chart 6
WALMART BREAKS OUT... Last Thursday's message showed Procter & Gamble breaking out to a new two-year high. PG also happens to be a top dividend-payer and the biggest holding in the XLP. Chart 7 shows PG continuing to rise. I also suggested that another staple dividend payer -- Wal Mart -- might be one of the next upside breakouts in that group. Chart 9 shows WMT breaking out today to a new 52-week high. That stocks is the second biggest holding in the XLP. Their relative strength lines (below charts) are just starting to rise for the first time in four months. The fact that investors are starting to turn toward defensive stocks is another sign that an overdue market correction is probably in the offing. And, as I suggested last week, dividend-paying stocks (especially in defensive groups like consumer staples) offer some protection against a market downturn.
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Chart 7
