DOW

Market Confusion

In The Highstreet Group by John Bartoletta

DOW JONES INDEX: The chart above was referenced in our March 21 Blog titled “Current Q1 Rebound is taking a Breather”. At that time we were looking for a pause and it seems to be playing out. The stock market has been stumbling a bit over the past week (as seen in the chart below), and this consolidation or pullback period could last a few weeks longer, but we do not expect to see anything major on the downside over the near term. This is all normal action given the strength of the past month and the fact that the major indexes have rallied back up to some resistance areas that by definition can take some time to work through.

The guesses are all over the place in terms of where the stock market may be headed, but we seem to hear many more negative comments than positive. Some analysts are “cautiously optimistic,” but few appear to be more bullish than that. What we do find interesting is the continued large number of bearish prognosticators out there that are calling the recent market strength a “rally in a bear market” as they view the general trading range of the past year as all part of a big top. Given the large amount of negative news from all angles that we hear about every day, you may have expected the markets to react—and they have. The fact that the markets have held up over the past year may be a sign of better things to come, but the proof would come on a breakout to the upside through the 18,000 level on the Dow Jones Industrials.

VIX INDEX: We have been referencing the charts (shown below) over the past few blogs due to the accuracy in predicting general direction within the market. At times this indicator is relevant and continues to be so at this time. This chart was the most compelling of the charts shown in the blog. It represents an overlay of the S&P 500 Index and the spread of the VIX spot (current) price minus the VIX 3 month futures price (as represented by the green and red shaded areas on the chart). It showed how rare it is for the current volatility to exceed the future expectation of volatility. This is called “Backwardation” and, when at extremes, can represent a near-term reversal in the equity markets. What’s compelling is that every time this VIX indicator showed a premium (shown in green) a short-term reflex rally ensued.

 

At this time (as indicated in the second chart below) the degree of discount has weakened (reversed) which correlates with the pause and slight pullback in the market. If the market heads lower and reaches a strong support level, we will focus on this indicator to look for a bottom and/or a new V-shaped rally.

TRADING UPDATE: We have held the cash weighting relatively consistent since the last update. We will be looking to add into this market at key support level (buying dips) with the goal of being fully invested early Q2. The remaining cash is being put to work quickly as we see opportunity. As always, the potential for using hedge positions as a trading tool to improve risk exposure in the portfolios will remain an option if market direction calls for it.