Archive for February, 2012

CBOE Volatility Index (VIX) Aimed At Long-Term Support

Posted in CBOE Volatility Index (VIX) on February 9th, 2012 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

On the heels of a January’s much better-than-expected employment report, equity prices leaped on Friday advancing a strong rally that began with the New Year. In doing so, the CBOE Volatility Index (VIX) continued to decline after hitting its peak of 48 last August. With deeply oversold conditions now present on weekly charts, the VIX appears to be aimed for a test of key long-term trend line support now sitting at the 14 level. Interestingly, this particular trend line found its origins in October 2007, which was coincident with the peak of the S&P 500 Index (SPX) at 1,576.

Since October 2007, the VIX has tested this key trend line support on four (4) separate occasions: May 2008, April 2010, February 2011 and April 2011. Each of these dates matches up closely with four (4) relative peaks in the S&P 500 Index as well.

While there is more downside ahead for the VIX in order to reach the 14 level, it would not be surprising to see the rally in the S&P 500 Index extend further until then. That being said, investors should be wary that the odds favor a corrective reversal in the S&P 500 once the 14 “objective” is met. While that reversal could start out with a muted pullback characterized by “range-trading” for a few months, complacency should be avoided as the political rhetoric heats up both in the United States as well as in Europe. In addition, Secretary of Defense Leon Panetta, who is grappling with cutbacks in the military budget, hinted that Israel might attack Iran as early as this spring in an attempt to stop Tehran’s efforts to build a nuclear bomb. If such a scenario were to occur, energy prices would likely spike sharply, which in turn could rattle the equity markets badly.

S&P 500 Index: A Very Messy, Worrisome Chart

Posted in The S&P 500 Index (SPX) on February 2nd, 2012 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

The accompanying chart of the S&P 500 Index (SPX) clearly has a lot of lines and curves on it …and it is messy. Up to the past week or so, a number of either bullish reverse Head & Shoulders patterns or bearish Head & Shoulders patterns have cropped up over the past 12 or 13 years that have defined the direction of the S&P 500 Index. Importantly, that series of patterns has done a reasonably good job of presaging equity price activity.

The problem, however, is that the “neckline” of a bearish Head & Shoulders pattern, which albeit already hit its downside target, has now been broken above at the 1,295 level. On the face of it, such a break would have to be viewed as a very positive event …particularly with the Fed’s latest missive suggesting that a 0% fed funds policy will be in place throughout at least late 2014; and with ECB offering unlimited three-year loans to the region’s banks in an effort to boost demand for higher-yielding assets.

On the other hand, the enormity of ever growing global debt levels is a huge issue for investors as well as policy makers, with many policy makers not in agreement over the issuance of a lot more debt. This is evidenced by the glaring dysfunction of the U.S. Congress, as well as the number and duration of rolling debt crises unfolding in Europe. And despite all of the monetary engineering done to date, a robust recovery (or even inflation) has not really taken hold. Moreover, some have viewed the Fed’s latest pronouncement to extend the 0% fed funds policy as a reflection that our central bank’s true concern is that “deflation”, not inflation, is the dominating worry.

Although an elevated level of consumer confidence, with nascent signs of housing and automobile buying activity is a plus, structural economic problems will likely mute any global growth prospects for years to come. Age related demographic forces are another set of problems yet to be faced.

As a result, the messy S&P 500 chart referred to before presents a few possible outcomes. If the S&P 500 Index (SPX) can break solidly above primary downtrend resistance drawn off the highs dating back to 2007 (currently coming at 1,335 with overbought conditions present on weekly charts), a move up to toward trend line resistance at 1,415 is possible.

A failure to decisively break above 1,335, however, leaves open the possibility that a very large and very bearish Head & Shoulders pattern targeting an eventual move down to the 780-800 area could now be developing instead.

Comments from Caterpillar CEO Douglas Oberhelman, foreseeing global growth in the 3.3% range lean toward a much more bullish and upbeat outlook for the current year. Hopefully, he will be right suggesting the market is now climbing the proverbial “wall of worry”. The reasons to cause worry, however, seem to be ubiquitous to many investors.