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Friday, December 19, 2008

Out Of Gas

I don't know if it's the pre-holiday trading (although today's volume was about average), or a full moon, or what is going on, but the market has just been strange lately.Despite a rise in treasury yields, the major indexes were a bit muted (other than the Nasdaq, thanks to good earnings from RIMM and ORCL). We seemed to be range bound in a very narrow range all day, until the last half hour, when we got a sell off. The SPX is below the 50dma again. MACD looks like it is weakening. 918 seems to be a brick wall that we can't get through. Unfortunately, we won't get any real resolution to this for another 2 weeks.

Technology lead the market today, asthe Nasdaq was the strength today. We still have resistance at 1602 which really hasn't been challenged. The late sell off took us right back below the 50dma.

The Russell 2000 gapped up above the 50dma, tested it from above, and finished above it. The Russell seems to want to assert some leadership, and that is good for a decent rally.

Since the market hit bottom in November, the VIX has been dropping faster than the market has been rising. On a few down days on the SPX (like yesterday) the VIX actually dropped. Todaay's candle is a possible reversal, so the VIX could bounce here.

The VIX and the CPC have traditionally pretty good sentiment indicators, and frequently indicated extremes in market sentiment just before major trend reversals. That doesn't seem to be working as well anymore. One reason I have heard, and I have no reason to doubt it, is the introduction of the short and ultrashort ETF's, which have in some cases replaced Puts as a hedge for long positions. Ordinarily, looking at these reading, the VIX dropping rapidly and the Put-Call ratio going barely above 1 twice since the November low, I would say we should be in a screaming rally.

If this week was unusual, next week could be downright bizarre. Volume will be very light, and the market could go anywhere. I am still expecting a rally, probably to about 1000 or so on the SPX, before another leg down and a retest of the November lows. That retest will be critical for making a bottom in this market.

I'll have the new highs shortly.

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