The February Stock Market Blues
Blue note a. Since 1999, February has been a particularly difficult month for the market. Eight out of those thirteen years have produced losses of 4.3% or more. Even in the up months of that same period, the market has been distinctively rocky in February. As Sy Harding explains: "February was a positive month in each of the last two years, with the S&P 500 up 3.1% for February in 2010, and up 3.4% in 2011. However, in 2010 the weakness came early, a 3-week market correction of 7.9% beginning January 19 and ending February 8. Last year the weakness arrived late, with a four-week 6.2% correction beginning February 18 and ending March 16."
Blue note b. The sentiment in the markets today is excessively bullish. The Barron's February cover that TK posted yesterday certainly attests to this. Furthermore, the most recent AAII Investor Sentiment Survey points to the same conclusion. The survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. This week’s poll of its members showed another jump, to 51.6% bullish and only 20.2% bearish. The AAII poll is considered to be in its warning area when bullishness reaches above 50% and bearishness drops below 20%.
Blue note c. Insider selling has been steadily increasing, and was especially heavy this past week. In the late Fall, as the market plunged in its first sell-off of the rally, insiders began buying heavily, 100 shares bought for every 80 sold according to Argus Research. Now however, as the market is heading for new highs, insiders are selling very aggressively, a ratio of 580 shares sold for every 100 bought. The Vickers Insider Selling Report is also showing excessive levels of corporate selling. Apparently, insiders are selling in a big way. In fact, according to the report, last week they sold six times more shares than they bought. Vickers is so alarmed, that they have sold most of their model portfolios, and gone all in cash! Mark Hubert's audio file:
Blue note d. The VIX index has been dormant until late last week. Also known as the fear index, It showed a very high level of fear or bearishness during the summer correction and at the October low. But as the rally off that low has progressed fear has disappeared, now measured at only 19 on the VIX Index, in the zone of low fear (high bullishness) usually seen near rally tops.
Bill Luby of VIX and More using the TVIX (VelocityShares Daily 2x VIX Short-Term ETN) points out quite an interesting & ominous aberration which occurred in Friday's session:
In the graphic below, I have drawn a large red rectangle around a period of approximately 83 minutes (10:36 a.m. – 11:59 a.m. PT) in which the SPX trended steadily higher, yet TVIX split with tradition and rose in dramatic fashion, logging a gain of 8.9% during the same time frame. For two securities that typically trade in opposite directions, this is a highly unusual decoupling. In fact, decoupling may be understating the change in the relationship, which became completely unhinged during the day. Note the yellow ovals that marked the two low points in the SPX some five hours apart. The SPX was unchanged over the course of these five hours, yet TVIX spiked 15.5% (!) during the same five hours. This is as big of an intraday deviation from the normal negative correlation that I can recall observing.
Returning to the 21.6% weekly jump in the VIX while the SPX remained flat, this is not the first time the VIX has taken flight in such a dramatic fashion while the SPX was unchanged. In fact, it just so happens that a little more than three years ago the VIX gained 25% in a week in which the SPX eked out a 0.3% gain. That week was the week of September 15, 2008, when the Lehman Brothers filed for bankruptcy.
Blue note e. The market has been extremely overbought for quite some time now. The Nasdaq, and small caps, have gotten absurdly overbought on their daily RSI's, with readings at 80 plus, that's basically unheard of. Jack Steinman from SwingTradeOnline.com writes: "The market had stayed overbought for way too long, and you know at some point, the rubber band will snap. It doesn't mean market death, but it does tell you to book some gains along the way, knowing things will be forced to unwind at some point in the very near future, especially when you see an 8 as the first number in the RSI world."
So you see my fellow Slope-a-Dopes, February may rear its ugly head once again this year. Afterall, we already know that the groundhog has the blues……