Friday was a very interesting day for technical analysis. I'm going
to make the case that the market is currently close to fair value – I
don't think we're overbought right now. That's not to say I'm not
currently bullish – my portfolio
is 100% long right now, and I'm taking that position because demand
is currently overpowering supply. The trend is up, but the current
value is sitting near equilibrium.
I routinely look at the volatility index, or VIX. This is the
measure of fear in the market, and directly influences the prices of
options. Notice how it's falling back toward normalcy. In fact,
current levels of the VIX (ranging 15 to 35) are fairly normal. This
tells me that a lot of the fear is leaving the market, and that the bad
news has been factored into prices already. That's not to say it's "up
up and away" from here, but for those perma-bears expecting the world to
suddenly wake up and dump their portfolios… don't hold your breath
(pending any new global disasters).
So why am I saying that
it's too quiet? Friday was "quadruple witching", meaning that contracts
for stock index futures, stock index options, stock options and single
stock futures all expired after trading ended. This usually results in
big market swings, as market makers (and market manipulators) attempt
to close out their positions profitably. This complex and
interconnected machine of hedging and derivatives usually makes for a
wild ride. Yesterday – not so much. See attached chart for my notes.
Friday morning I took a look at some measures of "maximum pain" –
it's a calculated price that would minimize losses for the market
makers. Stock and index values have an uncanny habit of settling at or
near the max pain, especially on quad or triple witching Fridays. This
will usually work to erase some of the gains from a sustained rally
(notice on my chart what happened in March.) The interesting thing
about yesterday is that nothing much happened: low volume, small range,
and max pain for the indexes I looked at implied the day would be
unchanged. I think what this tells me is that the market is
currently close to fair value, and where it goes from here depends on
the conviction of the buyers or sellers.
My focus as always is on the measures of supply and demand.
Currently, the NYSE bullish percent is rising – showing that buyers are
overpowering sellers. In fact, all of the bullish percents I monitor
with the exception of the NASDAQ, the financial sector, and the tech
sector are all showing strong up trends. This is the #1 key
consideration for which side of this market to be on – don't fight the
trend, and the bulls are in control right now. The strongest sectors as
far as bullish percentage goes right now are Telecom (66%), Utilities
(62%), Industrials (60%), Healthcare (57%), and Consumer Staples (56%).
I think the weekly chart
for the S&P 500 gives a hint at what might be reasonable to expect:
some resistance at around 1150, but I expect the bulls to have the gas
to above 1200. I think the 1030 to 1045 range has shown undeniable
buying support, and there is a clear double bottom established. I
wouldn't short this market.
This week has solidified my confidence in going long the market.
Expect me to transition away from sector ETFs into strong individual
stocks this week. I'll add the new positions to my portfolio posted here!
