Friday, August 24, 2007 2:24:20 PM
Season of the VIX — Market Cools Off As Volatility Returns and Volume Spikes
Aug 19 2007, 05:17 PM
By Jeffrey A. Hirsch
So much for the summer doldrums on Wall Street this year. Stocks have retreated as is often the case during this seasonally weak period, but with much more fanfare and volume than the garden variety soft patch. Sub-prime fallout and a global liquidity crunch have returned fear to the financial markets, threatening the prospects of Goldilocks’ survival.
What started out as a hot market in July cooled rather dramatically after the July 19 highs. Volume has soared and volatility has returned. But before we declare The Street in the clutches of the bear, let’s review how bad the carnage has really been.
As our reminder about how hot July soften precede sell offs was landing last month, the market proceeded to turn tail.At the high the Dow was up 4.4%, but that gain was quickly erased as the Dow tumbled 5.6% the last eight trading days of the month, ending the month down1.5%.
The Dow suffered the least damage of all the major indices and is the only benchmark that has not crossed below its200-day moving average. This is a testament to global growth and the earnings boost the Dow’s multi-national components receive from the weak dollar when they repatriate profits.
Despite all the fear and loathing stirred up by the current correction, the actual damage has not been that bad. This pullback may yet become more severe and turn into a real bear market, but for now support is holding right around the200-day MAs, except perhaps for the small caps, which may be feeling the credit crunch more painfully.
The Russell 2000 Index of small cap stocks fell 12.2% from its high and is negative for the year. R2K is the lone widely-followed index that has undercut its March 5 low. The Dow has lost about 8% since its high. After being up 12.3%,it is now just 3.2% higher for 2007. The story is much the same for the S&P 500and NASDAQ. Both are down about 9.5% from their highs and have given back most of their gains for 2007 with S&P off 0.8% and NASDAQ up 1.8%.
This current correction is just slightly more severe than what transpired back in late February and early March. A failure to find support around the 200-day MAs would suggest a further move to the downside. With the Dow being the last man standing above this critical level,we’ll be tracking the old blue chip aver-age more closely than ever.
Market internals, volume and volatility are quite a bit different than they were back in the first quarter. We had the sub-prime concerns, market weakness around the planet, and the unraveling of the yen carry trade back in February and March. But now the global liquidity crunch has gathered momentum and is threatening to send stocks lower. The question is whether the market can fend off the housing slump, an economic slowdown, inflation, and prevent the liquidity squeeze from turning into a run on bonds, stocks and all manner of financial instruments. Looking at the tape and internals the situation is less sanguine now.
Pulse of the Market
On the surface the Dow’s latest correction (1) looks similar to move earlier this year. It remains above its 200-day MA(red line) as it did back then. However,most other major benchmarks have breached that level, which was not the case back at the previous lows in March of this year. The rally attempt in early August pushed the MACD Buy indicator into positive territory for one day on August 8 (2). The MACD Sell indicator below stayed negative and both have continued to fall.
After 13 straight up Fridays for the Dow from March 23 to June 15, six of the last eight have been down with four down big and four losses in a row (3). These last eight Fridays have racked up a total loss of 778 Dow points. This marked the first Down Friday/Down Monday combination since June 22. The following week the market started its move to new heights. Until this week traders have come back in strong on Monday.
Friday’s losses and the large drops on several other days have surpassed the negative price action during the year’s earlier pullback. They have come on record volume during the usually quiet trading months. The week that ended March 2 was the only truly horrible week at the time. Now we’ve had three of the past four week register sizable losses (4) and are on the verge of a fourth.
Breadth went 9.7 to 1 negative the week of July 27 (5) versus a mere 3.3 to 1on March 2 and has remained negative the last four weeks. Further deterioration of market breadth would suggest lower levels for stocks. Over the past three weeks new lows have twice swelled to over 1000; the first time since July 2002 that the 1000 threshold has been reached (6). For the record the number of stocks trading has remained virtually unchanged in the last five years.
In the face of all the turmoil the kind of fear that has coincided with major bottoms has been absent. CBOE equity put/call volume retreated last week to 0.67 (7), indicating a dispelling of fear for the time being. However, the S&P 100put/call ratio, generally traded by professionals, has jumped up with about 50% more puts than calls, suggesting that trader’s are expecting further declines.
Investors Intelligence readings of the percent of advisors bullish and bearish have reversed course. From the recent“bearish” levels of 56.7% bulls and18.0% bears, bulls have dwindled to43.8% and bears surged to 31.5%. These numbers usually reach greater extremes and cross or touch each other near significant lows. By these metrics we are not there yet.
Aug 19 2007, 05:17 PM
By Jeffrey A. Hirsch
So much for the summer doldrums on Wall Street this year. Stocks have retreated as is often the case during this seasonally weak period, but with much more fanfare and volume than the garden variety soft patch. Sub-prime fallout and a global liquidity crunch have returned fear to the financial markets, threatening the prospects of Goldilocks’ survival.
What started out as a hot market in July cooled rather dramatically after the July 19 highs. Volume has soared and volatility has returned. But before we declare The Street in the clutches of the bear, let’s review how bad the carnage has really been.
As our reminder about how hot July soften precede sell offs was landing last month, the market proceeded to turn tail.At the high the Dow was up 4.4%, but that gain was quickly erased as the Dow tumbled 5.6% the last eight trading days of the month, ending the month down1.5%.
The Dow suffered the least damage of all the major indices and is the only benchmark that has not crossed below its200-day moving average. This is a testament to global growth and the earnings boost the Dow’s multi-national components receive from the weak dollar when they repatriate profits.
Despite all the fear and loathing stirred up by the current correction, the actual damage has not been that bad. This pullback may yet become more severe and turn into a real bear market, but for now support is holding right around the200-day MAs, except perhaps for the small caps, which may be feeling the credit crunch more painfully.
The Russell 2000 Index of small cap stocks fell 12.2% from its high and is negative for the year. R2K is the lone widely-followed index that has undercut its March 5 low. The Dow has lost about 8% since its high. After being up 12.3%,it is now just 3.2% higher for 2007. The story is much the same for the S&P 500and NASDAQ. Both are down about 9.5% from their highs and have given back most of their gains for 2007 with S&P off 0.8% and NASDAQ up 1.8%.
This current correction is just slightly more severe than what transpired back in late February and early March. A failure to find support around the 200-day MAs would suggest a further move to the downside. With the Dow being the last man standing above this critical level,we’ll be tracking the old blue chip aver-age more closely than ever.
Market internals, volume and volatility are quite a bit different than they were back in the first quarter. We had the sub-prime concerns, market weakness around the planet, and the unraveling of the yen carry trade back in February and March. But now the global liquidity crunch has gathered momentum and is threatening to send stocks lower. The question is whether the market can fend off the housing slump, an economic slowdown, inflation, and prevent the liquidity squeeze from turning into a run on bonds, stocks and all manner of financial instruments. Looking at the tape and internals the situation is less sanguine now.
Pulse of the Market
On the surface the Dow’s latest correction (1) looks similar to move earlier this year. It remains above its 200-day MA(red line) as it did back then. However,most other major benchmarks have breached that level, which was not the case back at the previous lows in March of this year. The rally attempt in early August pushed the MACD Buy indicator into positive territory for one day on August 8 (2). The MACD Sell indicator below stayed negative and both have continued to fall.
After 13 straight up Fridays for the Dow from March 23 to June 15, six of the last eight have been down with four down big and four losses in a row (3). These last eight Fridays have racked up a total loss of 778 Dow points. This marked the first Down Friday/Down Monday combination since June 22. The following week the market started its move to new heights. Until this week traders have come back in strong on Monday.
Friday’s losses and the large drops on several other days have surpassed the negative price action during the year’s earlier pullback. They have come on record volume during the usually quiet trading months. The week that ended March 2 was the only truly horrible week at the time. Now we’ve had three of the past four week register sizable losses (4) and are on the verge of a fourth.
Breadth went 9.7 to 1 negative the week of July 27 (5) versus a mere 3.3 to 1on March 2 and has remained negative the last four weeks. Further deterioration of market breadth would suggest lower levels for stocks. Over the past three weeks new lows have twice swelled to over 1000; the first time since July 2002 that the 1000 threshold has been reached (6). For the record the number of stocks trading has remained virtually unchanged in the last five years.
In the face of all the turmoil the kind of fear that has coincided with major bottoms has been absent. CBOE equity put/call volume retreated last week to 0.67 (7), indicating a dispelling of fear for the time being. However, the S&P 100put/call ratio, generally traded by professionals, has jumped up with about 50% more puts than calls, suggesting that trader’s are expecting further declines.
Investors Intelligence readings of the percent of advisors bullish and bearish have reversed course. From the recent“bearish” levels of 56.7% bulls and18.0% bears, bulls have dwindled to43.8% and bears surged to 31.5%. These numbers usually reach greater extremes and cross or touch each other near significant lows. By these metrics we are not there yet.
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