Volatility is back in the markets and it seems like people can't decide whether to buy or sell.

The Dow Jones Industrial Average broke below 10,000 last week.  Then again, it also crossed right back above that level.  If it seems like 10,000 has been one of the most 'magnetic' 1,000 point thresholds, you are right. On the other hand, is it a meaningful trading level?

All-in-all, May was quite a month!  We saw a "flash crash", followed by a 400-point
relief rally, followed by a slow motion free-fall, followed by a nearly
300-point rally. The cherry-on-the-top was last Friday's triple-digit
drop going into the long weekend.

Putting the Dow's Drops and Rebounds in Perspective.

The market's recent "flash-crash" ranks as the largest point-wise drop in history. But how does it stand up percentage-wise; and how many drops greater than 5% have we seen? Minyanville posted a visualization of the data (going back to 1928) that answers those questions. Click to the graphic for an interactive version.

One other point worth noting, historically, big gaps and daily rallies occurred most often in the context of bear markets.  They are not usually a sign of impending calm waters or smooth sailing.

Nonetheless, we've seen a decent pull-back and there are signs that the short-term might offer some upside bias.

Recently, Bearish Spikes Have Provoked Bullish Responses.

Bespoke reports that this week's sentiment surveys from Investors Intelligence and
the American Association of Individual Investors showed
sharp increases in bearish sentiment among both advisors and individual
investors.  The chart below compares the S&P 500 with bearish sentiment since the
start of 2009.  The current level of combined bearish sentiment is the
highest since the start of November.  As shown in the chart, since the
market bottomed back in 2009, spikes in bearish sentiment have actually
turned out to be pretty good buying opportunities.

So, let's look at the market.  Short-term, here is David Singer's
bullish case for the S&P.  It is drawn on a 60-minute chart, and shows a series of head and shoulder bottom patterns.  The implication is for a rally that measures the same distance as from the neckline to the head.

Longer-term, Singer shows a potential head and shoulders topping pattern on a daily view of the S&P 500.  Click it to see a
larger version.

We'll see. Hope you have a good week.

Business Posts Moving the
Markets that I Found Interesting This Week:

Volatility is back in the markets and it seems like people can't decide whether to buy or sell.

The Dow Jones Industrial Average broke below 10,000 last week.  Then again, it also crossed right back above that level.  If it seems like 10,000 has been one of the most 'magnetic' 1,000 point thresholds, you are right. On the other hand, is it a meaningful trading level?

All-in-all, May was quite a month!  We saw a "flash crash", followed by a 400-point
relief rally, followed by a slow motion free-fall, followed by a nearly
300-point rally. The cherry-on-the-top was last Friday's triple-digit
drop going into the long weekend.

Putting the Dow's Drops and Rebounds in Perspective.

The market's recent "flash-crash" ranks as the largest point-wise drop in history. But how does it stand up percentage-wise; and how many drops greater than 5% have we seen? Minyanville posted a visualization of the data (going back to 1928) that answers those questions. Click to the graphic for an interactive version.

One other point worth noting, historically, big gaps and daily rallies occurred most often in the context of bear markets.  They are not usually a sign of impending calm waters or smooth sailing.

Nonetheless, we've seen a decent pull-back and there are signs that the short-term might offer some upside bias.

Recently, Bearish Spikes Have Provoked Bullish Responses.

Bespoke reports that this week's sentiment surveys from Investors Intelligence and
the American Association of Individual Investors showed
sharp increases in bearish sentiment among both advisors and individual
investors.  The chart below compares the S&P 500 with bearish sentiment since the
start of 2009.  The current level of combined bearish sentiment is the
highest since the start of November.  As shown in the chart, since the
market bottomed back in 2009, spikes in bearish sentiment have actually
turned out to be pretty good buying opportunities.

So, let's look at the market.  Short-term, here is David Singer's
bullish case for the S&P.  It is drawn on a 60-minute chart, and shows a series of head and shoulder bottom patterns.  The implication is for a rally that measures the same distance as from the neckline to the head.

Longer-term, Singer shows a potential head and shoulders topping pattern on a daily view of the S&P 500.  Click it to see a
larger version.

We'll see. Hope you have a good week.

Business Posts Moving the
Markets that I Found Interesting This Week:

It's time to talk about American Idol (with the Finale this week, and all). 

Sorry, my mistake … another bad jobs numbers came out & the markets went down … so it is time to talk about the American Idle.

Last week was rough for the bulls; and if not for a reversal after the opening bell on Friday, it would have been a lot worse. Consider this: The Russell 2000 gained 2.5% after the open on Friday and still finished with a 6.44% loss for the week. So, yes, it could have been a lot worse.

Was That a Key Reversal Day in the Markets Last Friday?

The S&P Index 500 technically complied with all the rules of a "key reversal day." It plunged to a new low of a significant decline. It then rallied up on increasing volume, and closed well above the prior close.

And here is a longer-term chart showing the S&P on a weekly basis.

We will see if there is some buying triggered here.  If the bull-market swing is to continue it has to kick-in soon.

But Where Is the Selling Pressure?

With the market in a dizzying decline, why haven't we seen more committed bearish bets? Are traders going flat instead of short?

One reason is discussed by Carl Swenlin. His assumption is that bull market declines will be short-lived, and that a neutral signal eliminates market exposure during a correction, while at the same time addressing the lower probability outcome of a full bear market decline. In other words, we never know if a bull market correction will actually be the beginning of a new bear market, but we do know that most of the time it won't be, so it makes sense to bet with the odds and go neutral.

A Dash of Insight.

I saw a list that I wanted to share.  It from the Dash
of Insight blog, which is a consistently good source of information.  Here is an excerpt.

"I am pretty fussy about economic news related to jobs and housing, and I did not like what I saw.

• I closely watch building permits as the best leading indicator of new construction.  Construction is up (reflecting the tax credit, which has now expired) but building permits were down 11.5%.
• The BLS report on Business Dynamics showed job losses for the quarter ending in Sept., 2009, were about 300K worse than expected.  You will not see this news anywhere else.  Even though this is an "old" report, people should watch it as a way of verifying the accuracy of the "official" BLS payroll employment report projections.  Basically, this is an early read on eventual "benchmark" revisions.  There was plenty of job creation, including a million jobs from new establishments, but still not as much as estimated.  More detail is beyond the scope of this weekly summary, but those interested can get the essentials of the argument in my analysis of the November report (different time, same issue).
• The uptick in initial claims was also a negative for jobs.  We really need to see progress on reduced layoffs and more job creation.  Both seem to have stalled.
• The S&P 500 broke the 200-day moving average.  Many people view this as the most important technical indicator, keeping them on the right side of major trends.  This is being quoted as 1102 or so, and is something to watch.
• The ECRI indicators are in the growth area, but weaker than in past weeks.  Their interpretation?  "With WLI growth sinking further to a 43-week low, U.S. economic growth is set to start easing in fairly short order."  This seems to be an unusually strong emphasis on a "second derivative" interpretation of a strong reading, but it is their index.  I look at their numbers, but also at their own interpretation.

The high volatility in trading is frightening to nearly all investors.  Thursday was especially bad.  The extremely late rally on options expiration day makes the week's pricing look a bit better, but most observers will need much more convincing."

VIX Approaches Pre-2008 Record Highs

The Volatility Index is spiking.

When the VIX rises as it's done the past two weeks, emotions rule the market.

Bill Luby found that, prior to 2008, the VIX only managed to nudge its way over a reading of 45 on three instances:

• the Long-Term Capital Management crisis;
• the Russian Financial Crisis that preceded the LTCM debacle; and
• the height of the dotcom crash, when WorldCom filed for bankruptcy.

The table below summarizes the top ten pre-2008 VIX closing highs. Last week’s VIX spike to 45.21 would put it at #3 all-time outside of the 2008 financial crisis.

It's time to talk about American Idol (with the Finale this week, and all). 

Sorry, my mistake … another bad jobs numbers came out & the markets went down … so it is time to talk about the American Idle.

Last week was rough for the bulls; and if not for a reversal after the opening bell on Friday, it would have been a lot worse. Consider this: The Russell 2000 gained 2.5% after the open on Friday and still finished with a 6.44% loss for the week. So, yes, it could have been a lot worse.

Was That a Key Reversal Day in the Markets Last Friday?

The S&P Index 500 technically complied with all the rules of a "key reversal day." It plunged to a new low of a significant decline. It then rallied up on increasing volume, and closed well above the prior close.

And here is a longer-term chart showing the S&P on a weekly basis.

We will see if there is some buying triggered here.  If the bull-market swing is to continue it has to kick-in soon.

But Where Is the Selling Pressure?

With the market in a dizzying decline, why haven't we seen more committed bearish bets? Are traders going flat instead of short?

One reason is discussed by Carl Swenlin. His assumption is that bull market declines will be short-lived, and that a neutral signal eliminates market exposure during a correction, while at the same time addressing the lower probability outcome of a full bear market decline. In other words, we never know if a bull market correction will actually be the beginning of a new bear market, but we do know that most of the time it won't be, so it makes sense to bet with the odds and go neutral.

A Dash of Insight.

I saw a list that I wanted to share.  It from the Dash
of Insight blog, which is a consistently good source of information.  Here is an excerpt.

"I am pretty fussy about economic news related to jobs and housing, and I did not like what I saw.

• I closely watch building permits as the best leading indicator of new construction.  Construction is up (reflecting the tax credit, which has now expired) but building permits were down 11.5%.
• The BLS report on Business Dynamics showed job losses for the quarter ending in Sept., 2009, were about 300K worse than expected.  You will not see this news anywhere else.  Even though this is an "old" report, people should watch it as a way of verifying the accuracy of the "official" BLS payroll employment report projections.  Basically, this is an early read on eventual "benchmark" revisions.  There was plenty of job creation, including a million jobs from new establishments, but still not as much as estimated.  More detail is beyond the scope of this weekly summary, but those interested can get the essentials of the argument in my analysis of the November report (different time, same issue).
• The uptick in initial claims was also a negative for jobs.  We really need to see progress on reduced layoffs and more job creation.  Both seem to have stalled.
• The S&P 500 broke the 200-day moving average.  Many people view this as the most important technical indicator, keeping them on the right side of major trends.  This is being quoted as 1102 or so, and is something to watch.
• The ECRI indicators are in the growth area, but weaker than in past weeks.  Their interpretation?  "With WLI growth sinking further to a 43-week low, U.S. economic growth is set to start easing in fairly short order."  This seems to be an unusually strong emphasis on a "second derivative" interpretation of a strong reading, but it is their index.  I look at their numbers, but also at their own interpretation.

The high volatility in trading is frightening to nearly all investors.  Thursday was especially bad.  The extremely late rally on options expiration day makes the week's pricing look a bit better, but most observers will need much more convincing."

VIX Approaches Pre-2008 Record Highs

The Volatility Index is spiking.

When the VIX rises as it's done the past two weeks, emotions rule the market.

Bill Luby found that, prior to 2008, the VIX only managed to nudge its way over a reading of 45 on three instances:

• the Long-Term Capital Management crisis;
• the Russian Financial Crisis that preceded the LTCM debacle; and
• the height of the dotcom crash, when WorldCom filed for bankruptcy.

The table below summarizes the top ten pre-2008 VIX closing highs. Last week’s VIX spike to 45.21 would put it at #3 all-time outside of the 2008 financial crisis.