Phases of fear and elation in the VIX

March 18, 2009

Here we show a nice relationship between the VIX and the SPX.  While this is a commonly referenced pairing, many still challenge the value of using the VIX as a market indicator.  There are numerous ways too use the VIX and almost everyone has their own tweaks.  This chart shows a very clear inverse relationship with several distinct “phases” discernible in the value of the VIX.  These “phases” correlate well with the action in the SPX.  We have labled these phases “euphoria”, “fear” and “panic”.  We also included the 400 day moving average (equivalent to the 80 week) which we discussed previously in The Significance of the 400 day (80 week) moving average.  This bull/bear market reference point matches up very well with the action in the VIX, as the VIX moves into the “fear phase” just as the 400 day is coming under assault, before eventually breaking.  A final test of the 400 day from below, which we highlighted in late April 2008, was accompanied by one last dip into the “euphoria” zone for the VIX.  That was the “last chance” to get out before the drop gathered steam as the SPX then dropped over 50% in less than 12 months.

We added the notes on Bear Stearns and Citigroup for a consensus of the “expert” opinion at the time.

vixspx031809


Back to the future again and it’s not pretty

September 10, 2008

This post is the latest in a series covering the correlation of S&P 500 price movement during the bear markets of 2001 and 2008.  Previously, Is it really 2001 again? highlighted a number of similarities for both indicators and chart patterns in addition to the timing and relative resistance levels observed by both markets.  This expanded on the first entry Here we are again? 2001 vs. 2008 which started the discussion by showing the two markets spending a similar amount of time above the 1400 level, meeting resistance at a similar level in the area of 1560, forming a similar double top including a final fall retest followed by an extreme decline and culminating in a spring washout setting up an early summer bounce.

The correlation remained tight as both markets failed their early summer bounce by late May in the area of the 200 day moving average and the 50% retracement level of the fall to spring decline.  The correlation weakened over the summer as the current market started a much more drastic decline from the May top than occurred in 2001.  This time the spring lows were broken by July instead of waiting for September as in 2001.  A solid bounce from the July lows this year brought the S&P 500 back to just above the March lows where resistance was encountered around the 50 day moving average in the month of August.  Suddenly the correlation has returned as the market failed in August of 2001 at the 50 day moving average also.  As the calender turned to September in 2001, volume picked up as the market went into free fall.  Of course the 9/11 attacks affected the market as the month progressed and forever after.

But this year, the month of September has not started off any better despite the Feds attempt to stop the bleeding in the credit markets by taking control of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).  High volume distribution has been the theme with the exception of some serious short covering following the announcement this past weekend (and late Friday for those in the loop).  The bad news for the Feds and everyone else is, even as impressive as the short covering rally was Friday/Monday, it still never reclaimed the 50 day moving average nor the March lows.  If the July lows at 1200 don’t hold here, a repeat of 2001 may yet be in the cards.  The S&P 500 didn’t bottom until dropping under 950 in 2001 and the final bottom in 2002 saw intraday trading under 775.  We’re not ready to say it will get that bad this time, but taking out the July lows would suggest scary days ahead.

For those brave longs an entry at the July lows around 1200 is a good place to start.  Lows for the year are regularly made in September/October.


Not a positive look here

August 18, 2008

Financial and Consumer Discretionary sectors lead the way lower.

XLF (Financial Select Sector SPDR ETF) looks to be rolling over. Multiple indicators confirm the XLF is running out of steam (MACD, RSI, Relative Strength, ADX).

Our entry into the SKF (UltraShort Financials ProShares) looks poised to deliver great returns going into the fall.


The Significance of the 400 day (80 week) moving average

April 30, 2008
Once the 80 week fell late in 2000, it was quickly tested from below twice, but never overtaken until the bear was dead.
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For the prior 20 years up to 2000, the 80 week was a great support level. It was only broken significantly in 1981, 1987 and 1990.
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This level has also provided solid support since 2003 when it was overtaken, declaring the bear dead. Now we have another significant break with what so far looks like a test of resistance from below. Until this level is left behind, the smart trade is to buy fear only and fade greed, especially in the area of the 80 week moving average. It only helps that this is also the site of the 50% retrace from the recent high to the low.
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Official: Oil spill hasn’t reached Great Salt Lake

June 13, 2010

Emergency workers don’t believe 21,000-gallon oil spill has reached Great Salt Lake

Brock Vergakis, Associated Press Writer, On Sunday June 13, 2010, 6:36 pm EDT

SALT LAKE CITY (AP) — Emergency workers believe they have stopped a 21,000-gallon oil leak from reaching the environmentally sensitive Great Salt Lake, one of the West’s most important inland water bodies for migratory birds that use it as a place to rest, eat and breed.

But the spill has taken a toll on wildlife at area creeks and ponds, coating about 300 birds with oil and possibly threatening an endangered fish.

The leak began Friday night when an underground Chevron Corp. pipeline in the mountains near the University of Utah broke. The breach sent oil into a creek that flows through neighborhoods, into a popular Salt Lake City park, and ultimately into the Jordan River, which flows into the Great Salt Lake.

The 10-inch pipeline was shut off Saturday morning, when workers at a nearby Veterans Administration building smelled oil and called the Salt Lake City fire department, which notified Chevron. The pipe carries crude oil from western Colorado to a refinery near the Salt Lake City International Airport.

Jason Olsen, spokesman for the Salt Lake City Joint Information Center, said Sunday emergency workers believe they have contained the spill to the Jordan River.

But the spill still took its toll on birds at Red Butte Creek and at a large pond at Liberty Park, where visitors often feed birds from the shore and on rented paddle boats. About 300 birds were coated in oil and cleaned at Utah’s Hogle Zoo. Fewer than 10 have died, said Salt Lake City spokeswoman Lisa Harrison-Smith.

Most of the birds were Canada geese, although some ducks were also covered.

Harrison-Smith said the oil also flowed through several other riparian areas, which could threaten a rare Utah fish called a June sucker. It’s been listed as an endangered species since 1986.

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Florida Skips Offshore Oil Binge but Still Pays

June 12, 2010

By DAMIEN CAVE

KEY LARGO, Fla. — When rigs first started drilling for oil off Louisiana’s coast in the 1940s, Floridians scanned their shoreline, with its resorts and talcum-white beaches, and said, No thanks. Go ahead and drill, they told other Gulf Coast states; we’ll stick with tourism.

Now that invisible wall separating Florida from its neighbors has been breached. The spreading BP oil spill has already reached the Panhandle, and if it rides currents to the renowned reefs and fishing holes on both Florida coasts, the Sunshine State could become a vacation destination with the rules of a museum: Look, but don’t touch.

All because other states decided to rely on oil and gas, angry Floridians say; all because, in the water, there are no borders — only currents that can carry catastrophes hundreds of miles.

“There’s nothing we can do,” said Mike McLaughlin, 42, while stretching tanned shark skin on a dock here in the Keys. “We’re just sitting here, waiting for it all to disappear.”

Many Floridians, of course, say they are heartbroken for Louisiana, and they still reserve their most caustic criticism for BP and government regulators.

But with oil continuing to gush from a well off Louisiana, Florida has grown angrier at its oil-friendly neighbors. Gov. Charlie Crist said in an interview last week that “there’s a certain level of frustration” with the fact that Florida gets little if any financial benefit from offshore drilling, even though it shares the environmental risks.

On docks and beaches, many Floridians are less measured, and compare Louisiana to a neighbor with a bonfire that has set their block ablaze.

To some extent, it is a conflict set up by history. Louisiana and Florida may share the Gulf of Mexico, but they are essentially oil opposites.

Ever since World War II, when tar balls washed ashore across the gulf after German U-boats sank Allied oil tankers, Florida officials have held drilling at bay with state laws and lobbying in Washington to protect their state’s bustling tourism industry.

Louisiana, meanwhile, is an oil state through and through that discovered its first commercial deposits in 1901 and started drilling offshore in 1947.

State officials have never looked back, and the resulting divide between the two states is now economic as well as cultural: oil and gas contribute about $65 billion a year to the Louisiana economy, according to the state’s oil and gas association, while in Florida, tourism accounts for about $60 billion.

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SEC puts in new ‘circuit breaker’ rules

June 10, 2010

SEC puts into place new ‘circuit breaker’ rules to prevent repeat of May 6 stock market plunge

Marcy Gordon, AP Business Writer, On Thursday June 10, 2010, 5:44 pm EDT

WASHINGTON (AP) — Federal regulators on Thursday put in place new rules aimed at preventing a repeat of last month’s harrowing “flash crash” in the stock market.

Members of the Securities and Exchange Commission approved the rules, which call for U.S. stock exchanges to briefly halt trading of some stocks that make big swings.

The major exchanges will start putting the trading breaks into effect as early as Friday for six months. The New York Stock Exchange will begin Friday’s trading session with five stocks: EOG Resources Inc., Genuine Parts Co., Harley Davidson Inc., Ryder System Inc. and Zimmer Holdings Inc. The exchange will gradually add other stocks early next week, expecting to reach by Wednesday the full number that will be covered.

The Nasdaq stock market plans to have the new program fully in place on Monday.

The plan for the “circuit breakers” was worked out by the SEC and the major exchanges following the May 6 market plunge, which saw the Dow Jones industrials lose nearly 1,000 points in less than a half-hour.

Under the new rules, trading of any Standard & Poor’s 500 stock that rises or falls 10 percent or more in a five-minute period will be halted for five minutes. The “circuit breakers” would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time. That’s almost the entire trading day. But it leaves out the final 25 minutes before the close — a period that often sees raging price swings, especially in recent weeks as the kind of volatility that marked the 2008 financial crisis returned.

The idea is for the trading pause to draw attention to an affected stock, establish a reasonable market price and resume trading “in a fair and orderly fashion,” the SEC said.

On May 6, about 30 stocks listed in the S&P 500 index fell at least 10 percent within five minutes. The drop briefly wiped out $1 trillion in market value as some stocks traded as low as a penny.

The disruption “illustrated a sudden, but temporary, breakdown in the market’s price-setting function when a number of stocks and (exchange-traded funds) were executed at clearly irrational prices,” SEC Chairman Mary Schapiro said in a statement. “By establishing a set of circuit breakers that uniformly pauses trading in a given security across all venues, these new rules will ensure that all markets pause simultaneously and provide time for buyers and sellers to trade at rational prices.”

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Federal Reserve sees slightly better 2010 economy

May 19, 2010

Fed’s new economic forecast paints brighter picture of growth and employment for rest of year

Martin Crutsinger, AP Economics Writer, On Wednesday May 19, 2010, 3:08 pm EDT

WASHINGTON (AP) — Federal Reserve officials have a slightly brighter view of the economy than they did at the start of the year.

Fed officials say in an updated forecast that they think the economy can grow between 3.2 percent and 3.7 percent this year. That’s an upward revision from a growth range of 2.8 percent to 3.5 percent in their January forecast.

The Fed’s latest forecast sees the unemployment rate, now at 9.9 percent, dipping to between 9.1 percent and 9.5 percent by year’s end. In the January forecast, the Fed didn’t think unemployment would dip below 9.5 percent this year. The Fed prepared the latest forecast for its late-April meeting.

The Fed predicts an inflation gauge tied to consumer spending — excluding volatile food and energy costs — will rise just 0.9 percent to 1.2 percent this year. In January, the officials forecast an increase in prices of 1.1 percent to 1.7 percent.

The Fed’s updated outlook was prepared at its last meeting, April 27-28, and released Wednesday. It’s roughly in line with an Associated Press survey of leading economists done about a month earlier. According to the AP’s survey, the economy will grow 3 percent this year, and the unemployment rate will inch down to 9.3 percent by year’s end.

The Fed’s new outlook represents the middle range of forecasts of officials on the Federal Open Market Committee. That’s the group of Fed board members and central bank presidents who meet eight times a year to set interest rates.

At four of those meetings, including the April session, the central bank updates its economic outlook.

The Fed left its forecasts for next year and 2011 and the longer-run expectations mainly unchanged from January.

The Fed described the changes in economic growth in 2010 as a “modest” upward revision. The minutes said the figures available for the April meeting on consumer spending and business outlays were “broadly consistent with a moderate pace of economic recovery.”

But the Fed stressed that the economic recovery is expected to remain moderate, with the unemployment rate falling only gradually.

“Participants continued to expect the pace of the economic recovery to be restrained by household and business uncertainty, only gradual improvement in labor market conditions and slow easing of credit conditions in the banking sector,” the Fed minutes said.


Bailout, Indeed: Dow Up 404

May 10, 2010

By DONNA KARDOS YESALAVICH And KRISTINA PETERSON
Reuters

Stocks posted their biggest one-day gain in more than a year, boosted by the bailout package to stem Europe’s credit crisis.

The Dow Jones Industrial Average jumped 404.71 points, or 3.9%, to 10785.14, helped by gains in all 30 of its components. The average had its biggest one-day gain in both point and percentage terms since March 23, 2009.

The Standard & Poor’s 500-stock index rose 4.4% to 1159.73, led by its financial and consumer-discretionary sectors, up more than 5% each. All the broad measure’s other indexes posted gains as well.

The jump in U.S. stocks followed rallies in the Asian and European markets after the European Union agreed to a €750 billion ($954.83 billion) bailout, including €440 billion of loans from euro-zone governments., €60 billion from a European Union emergency fund and €250 billion from the International Monetary Fund.

In further coordinated efforts to assuage spooked markets, the European Central Bank will go into the secondary market to buy euro-zone national bonds—a step last week that its president, Jean-Claude Trichet, said the central bank didn’t even contemplate. Meanwhile, the Federal Reserve, working with other central banks, re-activated swap lines so foreign institutions can get access to loans.

“This bailout plan really avoided the worst-case scenario—it avoided contagion and the domino effect,” said Cort Gwon, director of trading strategies of FBN Securities. The package also shifts investors’ attention back to the U.S., where most economic yardsticks have been improving lately, he noted.

The Nasdaq Composite jumped 109.03 points, its first triple-digit point gain since October 2008. It closed at 2374.67, up 4.8%.

Trading volume was higher than the 2010 daily average, though below the frenzied pace of the previous two days, which included an unprecedented “flash crash” and traders’ scramble to square their books after certain trades were canceled. On Monday, composite New York Stock Exchange volume hit 7.1 billion shares, below last week’s peak near 11 billion.

U.S.-listed shares of European banks surged in reaction to the European Union’s bailout plan.


Geithner, Paulson to address meltdown probe

May 6, 2010

Meltdown probe hears from bailout architects Paulson, Geithner on ‘shadow banking’

Daniel Wagner, AP Business Writer, On Thursday May 6, 2010, 12:57 am EDT

WASHINGTON (AP) — A special panel investigating the financial crisis is preparing to hear from two key architects of the government’s response: Former Treasury Secretary Henry Paulson and Treasury Secretary Timothy Geithner.

Geithner and Paulson will provide their perspectives on the so-called “shadow banking system” — a largely unregulated world of capital and credit markets outside of traditional banks. They will describe their roles in selling Bear Stearns (BSC) to JPMorgan Chase & Co. (JPM) after pressure from “shadow banking” companies made Bear the first major casualty of the crisis.

The pair will testify Thursday morning before the Financial Crisis Inquiry Commission, a bipartisan panel established by Congress to probe the roots of the financial crisis. It is the first time the panel has heard from either of the men who called the shots in late 2008 as the global financial system nearly collapsed.

The panel is looking at nonbank financial companies such as PIMCO and GE Capital that provide capital for loans to consumers and small businesses. When rumors spread in 2008 that Bear Stearns was teetering, these companies started what former Bear Stearns executives described Wednesday as a “run on the bank,” drawing so much of its capital that it could not survive.

Then-Treasury Secretary Paulson and Geithner, as president of the Federal Reserve Bank of New York, engineered Bear’s rescue. The New York Fed put up a $29 billion federal backstop to limit JPMorgan’s future losses on Bear Stearns’ bad investments.

Bear Stearns was the first Wall Street bank to blow up. Its demise foreshadowed the cascading financial meltdown in the fall of that year.

The panel is investigating the roots of the crisis that plunged the country into the most severe recession since the 1930s and brought losses of jobs and homes for millions of Americans.

In earlier testimony before the House Committee on Oversight and Government Reform, Paulson defended his response to the economic crisis as an imperfect but necessary rescue that spared the U.S. financial market from total collapse.

“Many more Americans would be without their homes, their jobs, their businesses, their savings and their way of life,” he said in testimony prepared for that hearing.

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Gold hits record near $1,150/oz as dollar slips

November 18, 2009

Wed Nov 18, 2009 5:13am EST

By Jan Harvey

LONDON (Reuters) – Gold hit a fresh record high near $1,150 an ounce on Wednesday, boosting precious metals across the board, as a dip in the dollar index added to momentum buying as prices broke through key technical resistance levels.

In non-U.S. dollar terms, gold also climbed, hitting multi-month highs when priced in the euro, sterling and the Australian dollar.

Spot gold hit a high of $1,147.45 and was at $1,146.05 an ounce at 0948 GMT, against $1,141.50 late in New York on Tuesday.

U.S. gold futures for December delivery on the COMEX division of the New York Mercantile Exchange also hit a record $1,148.10 and were later up $7.10 at $1,146.40 an ounce.

“Yesterday the market took a breather and tested below $1,130 very quickly, (but) a few physical related bargain hunters were lined up to grab the dip,” said Afshin Nabavi, head of trading at MKS Finance in Geneva.

The market is being underpinned by fresh interest in gold from the official sector, he said, after a recent major bullion acquisition from India and smaller buys by the central banks of Mauritius and Sri Lanka.

The acquisitions underlined gold’s appeal as a portfolio diversifier, especially in an environment where further dollar weakness was expected, analysts said.

The dollar eased back on Wednesday from its biggest rise in three weeks in the previous session, as traders awaited U.S. inflation data due at 1330 GMT.

The dollar index, which measures the U.S. currency’s performance against a basket of six others, was down 0.37 percent, while the euro/dollar exchange rate firmed.

Other commodities also climbed, with oil rising back toward $80 a barrel and copper to 13-1/3 month highs near $7,000 a tonne. Both are being lifted by the weak dollar.

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