Investors who pay close attention to the financial markets by and large spend a fair amount of time being “perplexed.” If you take all the “news” related to the markets and combine that with all the day-to-day and week-to-week gyrations of the markets, there often seems to be no rhyme or reason for what goes on (hence the reason I generally advocate a slightly less hyper, more trend-driven approach).
But sometimes it all seems to come crystal clear. In the most recent fortnight most of the major market averages (with the Dow and S&P 500 being the primary exceptions) have touched or at least teased new highs. Facebook got crushed and the market didn’t tank. Tesla struggled mightily before bursting back into the bright sunlight – and the market didn’t tank. In fact, all kinds of things have happened and still the major U.S. averages march relentlessly higher backed by a strong economy, reasonably moderate inflation and higher, yet by no means high interest rates.
At this point, it appears “obvious” that there is no end in sight to the Great Bull Market. A number of momentum studies I have read lately seem to all confirm that the U.S. market will continue to march higher to significantly higher new highs.
And the fact that it is so “obvious” scares the $%^&amp; out of me. Don’t misunderstand. This is not about to devolve into a hysterical “Sell Everything!” screed. The trend is bullish therefore so am I. But the “what could possibly go wrong” antennae still pop up from time to time. So here are some random views regarding all things stock market.
Figure 2 displays my own 4 market “bellwethers”, including the semiconductors (SMH), Dow Transports (TRAN), Inverse VIX ETF (ZIV) and Sotheby’s Holdings (BID). At the moment, none of these are actively “confirming” new highs and they each have a clear “line in the sand” resistance level overhead. So, for the moment they presently pose something of a minor warning sign.
While the U.S. economy and stock market appear to be hitting on all cylinders, the rest of the world is sort of “chugging along.” Figure 3 displays 4 “Geographic Groups” that I follow – The Americas, Asia/Pacific, Europe and Middle East. The good news is that each group is presently holding above it’s respective 21-month moving average. So technically, the trend is “Up.” But the bad news is that each group has some significant overhead resistance, so the current uptrend is by no means of the “rip roaring” variety.
Figure 4 is from www.sentimentrader.com and displays those instances in the past when the VIX Index fell below 11% for the first time in 3 months. Historically, VIX makes some kind of an up move in the 2 to 3 months following such occurrences.
…It might make sense to consider a long volatility play (NOTE: Long volatility plays using ticker VXX have a long history of not panning out as ticker VXX is essentially built to go to zero – for more information on VXX and the effects of “contango” please see www.Google.com. Long VXX trades are best considered).
The maximum risk is $642 if VXX fails to get above the breakeven price of $32.28 by October 19th. On the other hand, if something completely not “obvious” happens and volatility does in fact spike, the trade has significant upside potential.