Fear Strikes Out

BY MARTIN GOLDBERG, CMT | april 16, 2010

The markets are heading straight up without even taking a breather. As of Thursday after completing the January correction, there have been 34 days up and only 13 days down. Over that timeframe the S&P has gained about 16%. None of the down days were particularly scary and there were only a few occasions where the S&P had two straight down days. Now, after all of that bullish action, the indices appear to be making a parabolic move to the upside. Whereas volume has been a bit lackluster during the recent up wave in February and March, with mostly good quarterly earnings reports out, volume has picked up considerably over the last few trading days. Momentum-wise, markets are in overbought conditions not seen in several years. Over the short term (days to a week), there is the possibility that the market will begin to climax with continued parabolic action to the upside accompanied by climatic volume. Many individual stock charts would show exhaustion gaps to the upside. Such a move in the markets would likely signal a bearish change of trend beginning with panic buying. This would be the ultimate paradox of technical analysis - a bullish move that signals a bearish change of trend. 

But let’s not get ahead of ourselves. At this point, it is just a speculative scenario. When and if this occurs, the market will tell us clearly what is going on. The climatic volume would be a dead giveaway. In the meantime, the story is the same as it was in this space last month. There are clear skies and sunshine and a bull market in the short term. You should be long.

As I draft this on Thursday evening, I’m interested in how the overall market reacts to Wall Street’s skeptical opinion of Google’s earnings on the eve of options expiration.

Amongst technicians and techno-fundamental analysts there seems to be a consensus of opinion. This consensus is that nothing bad is going to occur in the markets in the short term.  The market would fool a lot of folks by doing what everyone does not expect, and that would be a sharp and decisive correction to the downside. But on this score, I’m like all the others. Whereas perhaps ten years ago, one could have rationalized that markets try to fool the crowd, this is no longer the case in the stock market. Since the 2003 bottom, except for when the market crashed for about a year and a half, there have been no corrections of more than 10% in the S&P 500. Of course this has been the case in the last 13 months as well.

The $VIX, also known as the fear index, is below its 2-1/2 year lows. A move of the index to about 10 would correspond to the market top of October 2007. As of Thursday evening, with downside momentum waning, the VIX looks poised for a sharp correction to the upside. Still, the buying climax scenario would drive the VIX to at or near all time lows.

This would be before fear would hit a homerun. But again, there is no need to speculate. The market will say loud and clear what it wants to do. Until then, fear strikes out!

Today’s Market

The market didn’t digest the Google earnings well. Although more of a buying panic would have been better, maybe today’s action is signaling a correction of the current uptrend. And if it is, a 44 day uptrend is not corrected in only one day. If the lows of today are taken out, that would probably confirm a correction in the weeks to month timeframe.

Fear hit a homerun today. The VIX was up big today. This may be another signal of a correction if not a change of trend.

Have a great weekend.

Martin Goldberg