Trading Notes: Monday, May 2nd By Brett Steenbarger, Ph.D.
* May 2, 2016
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* We saw a sharp selloff on Friday, with NASDAQ shares taking out their early April lows and new monthly lows outnumbering new highs, 583 to 513. VIX hit 17 during the session before dropping on a late rally. That rally has continued modestly in overnight trading. On a short-term basis, we're oversold, with fewer than 30% of SPX shares trading above their 3- and 5-day moving averages. My intermediate measures, however, are not yet in oversold territory. My leaning is to sell bounces that cannot take out Friday's highs.
* One concern I have about the market is the change of regimes in recent sessions. The weak dollar is buoying commodities but not stocks, and it's growth stocks (SPYG) underperforming value ones (SPYV). Earnings have not been impressive and we seem to be pricing in economic weakness. It's far from clear that the move to negative interest rates has sparked either economic optimism or growth. All that being said, I am treating this as a correction within a larger upward cycle, not as the start of a bear market.
* Note how the realized volatility of VIX (implied vol) has hit low levels at relative market peaks and has peaked at relative market bottoms. We are coming off a very low vol of VIX.
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