When I sent my last post a month ago “Sell in May and go away” made the rounds in the newswires. Now with the benefit of hindsight we know that markets have their own dynamics and hardly follow what’s broadcasted in the news and least of all any people funny rhymes. This is a follow-up on my post a month back. I advocated higher prices due to the fact that at the end of April quite some selling was spent and high readings of breadth indicators did not suggest that we will ‘fall out of the sky’ and start a bear market as suggested by some analysts. More damage needs to be done for a bear market to materialize and indeed, the markets have been fairly robust lately. The ‘biggest threat since the cold war’ got shrugged off, earnings revisions are positive and accelerating, economic data are improving again and last but not least, market commentators refrain from proclaiming the S&P at 3000 soon (remember Gold at 2000? Apple at 1000?).
Today I would like to post two interesting charts. The first chart is based on the idea of SpikeTrade/Alex recent post about the VIX. I had a closer look into his VIX idea and found the following:
It is very rare that the VIX is below 12 and down there is not quite the condition for a market top. Markets need a greater volatility to head down in a meaningful way for a large correction or the start of a bear market. For a top to form the VIX is ideally above 18/20 after a steady and prolonged increase. A VIX at low levels shows too much stability for prices to simply drop out of the sky. The last market tops show a curling to very low levels of the VIX ahead of an increase back above in the 20s before a final market top. Right now we are seeing the same curling again with the VIX at very low levels. Using the dynamics of the previous market tops and taking the current pace of the VIX development into account, it will take at least two years before the VIX is reaching levels at which a market top could become possible, maybe even longer. I am not trying to forecast the markets but to me it is never a bear market when the VIX is at historical low levels. Of course, nothing ever goes up or down in one straight line (K. Lovvorn). Markets are inhaling and exhaling (A. Elder). Rallies and pullbacks or even the odd correction are the characteristics of the markets. They would simply add to the jagged texture of the line on close but nothing more.
The second chart shows the NASDAQ with its McClellan Oscillator. Watch how there is strong upward initiation if the McClellan Oscillator gives a reading above 40 and higher prices nearly always follow. Watch as well how a failure to reach the 40 threshold indicates weakness for the immediate uptrend. Now at the right edge of the chart you can see that we just got a +40 reading, giving us the message of strong initiation and promising us more upside in the weeks and maybe months ahead. This assessment is for the NASDAQ only and what is good for the NASDAQ is good for the overall market.