This bull market is starting to feel pretty tired to me. The recent volatility spikes on January 19th and 28th (highlighted in the graph below) look to me as indications that the overall market is getting nervous— reminiscent of April of last year. I don’t expect another Flash Crash, but I do expect a significant market correction within the next month.
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I put a 1 point trailing stop sell order on XIV yesterday, it filled at 145.2.
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Since November 2009 I have been commenting on the eerie day to day correlation between the market (specifically SPY) of 2003/2004 and 2009/2010. These charts continue to track with November 16th’s closing value of SPY (118.16) differing only 0.28 points from SPY’s closing (117.88) on November 16th, 2004—six years ago.
SPY 2003/2004 vs SPY 2009/2010, click to enlarge
Recently I noticed another correction with the past—the market rally beginning in February 2010, versus the current rally that started in August. Today’s closing is within 0.32 points of the April 27th close (118.48)—55 trading days into the twin rallies.
Twin rallies Feb and Aug 2010, click to enlarge
Soon one of these correlations is going to break. In 2004 the market went into a sustained rally starting in November. In May 2010 the February rally stumbled, with the aid of the Flash Crash into a significant correction.
My guess is that the market is going to be going down for a while…
SPY’s 2010 price path for the 8th of October is about 3 points higher that the 2004 trend top line, but that is consistent with 2010′s considerably higher volatility. Recently there have been articles noting relatively low trading volumes, but compared to the normalized volume in 2004 (which at an absolute level was about 3.5x lower) volumes don’t look out of line.
SPY 2004 vs 2010, click to enlarge
The rally that we are currently in started around the 31st of August. To me it has felt similar to the long rally we had starting in February 2010. No wonder. Both rallies started with SPY in the 105 to 106 range, and have tracked closely since then on a day by day basis–see below.
SPY rallies: Feb 2010 vs Aug 2010, click to enlarge.
If these rallies stay in sync then we would expect the next bear cycle to start right before Thanksgiving.
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I’m betting that the market is due for a downswing. If you are a sixfigure contrarian, now is the time to go long… I sold SPY short at 112.99 and bought Oct S114 calls at 1.64 for insurance. Worst case loss $2.65/share.
The closing value of SPY is within about a dollar of the 2010 bottom trendline in the chart below. There is lots of talk about a double dip recession, but I’m betting on a bounce.
SPY 2003/2004 vs SPY 2009/2010, click to enlarge
The S&P 500 has already reached levels this year that weren’t reached until December 2004 in the tech stock crash recovery. The volume levels are underwhelming, but on almost every other front the bulls are celebrating. It doesn’t hurt that business continue to report very good numbers. It is hard to get a good doom and gloom mood going with folks like Intel and IBM beating analyst’s numbers. Malaise in the financials could spread if Goldman gets taken down a few notches, but after a weekend to think about it investors evidently decided that it wasn’t enough to derail the whole recovery.
My tendency is to react too quickly to the market’s moves—so I’m trying to be patient. I wouldn’t be surprised to see this correction last a bit longer, the market seldom jumps back up immediately after a blow-off day like last Friday. The VXX continues to build popularity on down days—it traded over 22 million shares on Friday—which looks to be 7 million over their previous record.
SPY 2004 vs 2010, click to enlarge
Looking a the chart below you can imagine this year’s stock market getting back on the 2009 trend line, leaving the 2003/2004 correlation behind. But I’m still betting that the market is in a sideways mode, rather than a continuing raging bull.
The most notable change in the curves since my last update on the 18th of March is the big drop in normalized volume–something we didn’t have till the Summer of 2004. Volumes have been low recently, so this drop-off isn’t surprising. If the 2004 pattern holds true, the 30 day moving average of volume will drop during rising prices, and start increasing a couple weeks before rallies occur.
This bull run has been going on since the 8th of February. A very long time without a correction in these uncertain times. In watching the market action I have been surprised at the down days. In-spite of the late January scary correction and market shocks that I would expect to send the S&P 500 down a percent or two, the market has shown remarkable resilience.
In conversations with my friends, most of which are not active traders, I have noticed a pattern. Most of them are out of the market, expecting a double dip recessi0n. Perhaps this is the overall situation. Overall there are a lot of bulls remaining, but for the most part they are buy and hold types, not trying to time the market. Are the people that are likely to get scared after a long bull run-up and sell on scary days already be on the sidelines? If this is the case this market might have some upside left in it.
250 Days of SPY, click to enlarge
The intraday SPY prices for the last two days have overlapped with SPY’s March 9th and 10th 2004 values.
Since March 9th, 2009 the SPY values exactly 6 years apart have matched each other within 15 points all the time and on average have closed within 4.5 points of each other. While the calendar synchronicity is surprising, it isn’t surprising that the recoveries after two big crashes have looked similar–a huge recovery rally, followed by some sideways action. The volatility of the 2010 sideways action has already been 2X what we experienced in 2004, so I think it is fair to predict a wider trading range moving forward. The big question though, is whether we stay in a similar, albeit wider, trading range, or will we breakout one direction or the other.
As usual the doomsayers and boomsayers are present in roughly equal parts. The state of the commercial real estate market looks grim, but it doesn’t have the feel of the general destabilization that accompanied the personal real estate crash. Small and medium banks, not too big to fail, seem to have most of the exposure–when they fail it isn’t as scary. And when a commercial property owner does default on their loans the leasers don’t disappear, their choices stay about the same. A large local shopping complex recently into default and reverted to the original sellers. The defaulters were out their interest, the sellers got their property back, and the shoppers kept shopping–hardly a nightmare scenario. Stock valuations look high, but they usual do at this point in a recovery, because profits have not fully recovered.
High unemployment will dampen consumer spending and governments will continue feeling the pain from expanding their spending and benefits to the max during the boom times, only to discover that it is harder to cut than to add.
I’m betting on sideways.
SPY 2003/2004 vs 2009/2010, click to enlarge.
I have been not so patiently waiting for the market to pick a direction. I have been surprised at the strength of the rebound from the lows a month ago–we are less than a point away from SPY setting 15 month highs. My gut is still telling me we are in a trading range similar to 2004 and 1999 after big bull run-ups, but I’m not willing to put a lot of chips down to back that up. I’m still about 80% in cash, with my bearish SDS play somewhat in the red. Oil looks high, and I’m not anxious to try and capture the upcoming March SPY dividend because of what feels like downside risk.
Over the last year I have not tried to strongly play the downside moves, but I wondering if I should be, for example going long on VIX options, or shorting SPY in some fashion. The upside odds look quite a bit lower than the downside odds right now.
SPY 150 day chart, click to enlarge
Off the trendline, but what’s next?
SPY 150 months, click to enlarge
