The NASDAQ Composite (COMPX) opened modestly higher at 1611.17 on Tuesday, and, thanks to the substantial rise in fear on Monday, COMPX spent the entire session in positive territory with a close significantly higher at 1627.67, +23.70 (+1.48%).
The NASDAQ wall of worry (VXN (NASDAQ 100 Volatility Index) and QQV (QQQ Volatility Index)) collapsed on Tuesday with VXN revealing that an unusual rise in complacency occurred for NDX (NASDAQ 100) and QQV revealed that an unusual rise in complacency occurred for QQQ (NASDAQ 100 Tracking Stock). The NASDAQ is deemed untimely on Wednesday however (an unusual rise in complacency usually portends strength) because the very sharp rise in complacency for the S & P 100/value stocks, Monday’s technical sell signal, and Friday’s likely intermediate term (and short term) cycle high will probably result in weakness.
RSI, stochastics, and ROC for NDX/QQQ flashed a sell signal (NDX 1 year chart with technical indicators) on Monday June 9 which is a short term as well as an intermediate term sell signal.
Friday June 6’s spike up in the major averages was similar to what occurred at the December 2, 2002 as well as the mid/late August 2002 intermediate term cycle highs in the previous two cycles. The May 13 high (NDX 1165.53), which was a potential intermediate term cycle high, didn’t spike up dramatically above the session highs at the time, so, looking for a dramatic spike in the major averages appears to be another characteristic of intermediate term cycle highs. I’ll have to backtest this more to determine it’s validity but it appears Friday June 6 was an intermediate term cycle high for NDX (1265.69) and most if not all the major averages.
Looking for a dramatic spike in the major averages to help time intermediate term cycle highs makes a lot of sense because intermediate term cycles follow parabolic patterns with a slowly rising curve early in the cycle (though intermediate term cycles begin with dramatic rallies followed by very sharp declines, the end result is a slowly rising curve early in the cycle) and a rapidly rising curve late in the cycle culminating in a spike up at the end of the cycle to complete the parabolic intermediate term pattern/upcycle. The intermediate term cycle high for NDX (1265.69) and most if not all of the major averages probably occurred about 45 minutes into Friday June 6’s session. May 13’s high (NDX 1165.53) was an unlikely intermediate term cycle high because it didn’t spike up dramatically above the session highs at that time.
The intermediate term cycle high probably occurred on Friday June 6 because the wall of worry (VIX, VXN, QQV) rose substantially (two weeks or so prior to June 6) just as it did (actually just VIX rose substantially from 27ish in late November 2002 to 31ish at the 12-2-02 intermediate term cycle high while VXN and QQV bottomed (extreme of complacency near the intermediate term cycle high)) prior to the December 2, 2002 intermediate term cycle high. An unusual rise in fear portends weakness.
Intermediate term cycle high timing can probably be finetuned (after seeing an unusual rise in fear following a collapse of the wall of worry to extremely low levels) by waiting for dramatic deterioration in the market’s health as evidenced by a deterioration in the Advance/Decline Ratio and Up/Down Volume (primary fundamental indicators/measures of the market’s health). They’ve been healthy recently but Friday and Monday were exceptions with the NASDAQ Advance/Decline Ratio at 20:11 in favor of decliners and up/down volume at better than 3:1 in favor of down volume on Monday. The continuing deterioration in breadth on Monday, combined with the substantial rise in the wall of worry the past two weeks (an unusual rise in fear), is a sign that the intermediate term cycle has probably turned down though the wall of worry collapsed on Tuesday.
Also, the fact that the wall of worry fell much more in percentage terms than the market rose in recent months (major rise in complacency) portends dramatic weakness in the near future (weeks/months following an intermediate term cycle high).
An unusual rise in complacency occurred for the NASDAQ 100 on Tuesday, with VXN (NASDAQ 100 Volatility Index) falling -3.43 (-9.16%) to 34.00 while NDX (NASDAQ 100) rose +17.44 (+1.46%) to 1212.99 which reveals that an unusual rise in complacency occurred for NDX because VXN fell dramatically in percentage terms versus NDX (NDX wall of worry collapsed) rising significantly which normally portends strength in NDX on Wednesday but the very sharp rise in complacency for the S & P 100/value stocks, Monday’s technical sell signal, and Friday’s likely intermediate term cycle high will probably result in weakness.
An unusual rise in complacency occurred for QQQ (NASDAQ 100 Tracking Stock, +0.45 (+1.51%) to 30.18) on Tuesday since QQQ rose dramatically less in percentage terms than QQV (QQQ Volatility Index, -3.16 (-9.80%) to 29.10) fell (QQQ wall of worry collapsed) which normally portends strength in QQQ on Wednesday but the very sharp rise in complacency for the S & P 100/value stocks, Monday’s technical sell signal, and Friday’s likely intermediate term cycle high will probably result in weakness.
On Tuesday VIX fell (-1.58 (-6.66%) to 22.13) versus a rise in OEX of +4.75 (+0.97%) to 496.09 which was a very sharp rise in complacency for the S & P 100/value stocks (OEX is about 75% value stocks) since the wall of worry (VIX) fell much more in percentage terms than OEX (S & P 100) rose which portends weakness in OEX on Wednesday. The S & P 100 is deemed untimely on Wednesday.
The CBOE Put/Call Ratio at an elevated level (at or above 0.75 but below 0.90) of 0.78 at Tuesday’s close suggests there will be weakness early on Wednesday because it’s a reliable non-contrarian indicator of the next session’s early action except at extremely high (at or above 1.05) or extremely low levels (at or below 0.50) where it sometimes is also a contrarian indicator (sometimes portends early substantial strength (below 0.50) or a sharp rally following early potentially severe weakness (at or above 1.05), judgement is involved).
The NASDAQ TRIN closed at a bullish level of 0.66 (much more activity in rising issues) on Tuesday which is positive technically but most of the final two hours of trading were spent in neutral territory (0.80-1.20) with a decline to bullish territory occurring in the final half hour from levels above 1.00 indicating more activity in declining issues during much of the final two hours. A level between 0.35 and 0.80 is a bullish range for the NASDAQ TRIN because it indicates much more activity in rising issues. A NASDAQ TRIN above 1.00 indicates more activity in declining issues. A NASDAQ TRIN between 1.20 and 1.50 is a clearly bearish “red zone” range because it indicates much more activity in declining issues but not a very oversold condition. If the NASDAQ TRIN rises above 1.50 you can begin to look for a rally and if it rises above 2.00 that tends to be a reliable short term buy signal (very oversold condition).
Looking at last week’s NASDAQ 100 (NDX) Chicago Mercantile Exchange Commitments of Traders in all Futures Combined and Indicated Futures (Reportable Positions as of June 3, 2003), the speculators (hedge funds and other speculators/traders) sold 124 long contracts and added 2843 short contracts which portends strength (bearish bias with speculators being contrarian indicators) whereas the commercial traders bought 1233 long contracts and bought 1726 short contracts which is mildly bearish (non contrarian indicators (know what they’re doing)).
In the past seven weeks NASDAQ Institutional Money Flow (primary fundamental indicator) has turned negative (five of the past seven weeks) after being positive for three months. Last week there were significant outflows in three of the sessions with Friday’s “positive” money flow probably due to short selling on upticks. On Friday June 6, when a dramatic selloff occurred following a very firm first 45 minutes of trading, there were 7488 uptick block trades versus 7074 downtick block trades on the NASDAQ probably as a result of short selling on upticks.
In the past two months the insider sell/buy ratio (another primary fundamental indicator) more than quadrupled:
MAY $ Value Sells = $7,373,062,001 $ Value Buys = $357,955,496 Sell / Buy = 20.60 APRIL $2,656,070,973 $247,416,809 10.74 MARCH $2,596,777,616 $577,142,734 4.50
It amazes me that the so called experts in the field rarely seem to use primary fundamental indicators such as the above to discern what’s going on. The change in May’s figures occurred because the first figures weren’t the final figures for the month.
One has to understand fundamentally what’s going on in the economy. Outside of autos and housing (spurred by rock bottom interest rates which is a clear sign of a weak economy) the US private sector is recessionary and much of the world is in the same boat. Companies like Cisco Systems (CSCO), Intel (INTC), and Applied Materials (AMAT) have negative top line (revenue) year over year growth on the order of -4%+. Bull markets aren’t built on negative growth and layoffs.
The weak US dollar is a result of the weak US economy, an easy money Fed policy, burgeoning budget deficit, and higher rates in Europe which attracts capital to Europe, thereby strengthening the Euro against the US dollar (USD) despite an even more sluggish economy in Europe. The USD has tended to decline sharply even when the major US stock indices rallied sharply recently which is a negative divergence. The U.S. DOLLAR INDEX June 2003 (FINEX) closed at 92.84, -0.74 on Thursday May 29.
American Association of Individual Investors (AAII) % bullish (AAII has been a useful non-contrarian sentiment indicator at extremely low levels below 40% bullish and extremely high levels above 60% bullish.) @ 52.0% bullish is a neutral factor for the prospects of stocks during the week ending 6-13 because it is at a mid range level of bullishness. This has been a surprisingly accurate indicator of the market’s tone for the next 5-7 sessions. I believe it’s released on Wednesdays, so I use it basically as a one week non-contrarian indicator from the time I get it which is usually on the weekend.
This is an extremely complacent/very low volatility environment similar to March 2002 when VIX fell to nearly 18 and VXN fell to nearly 35. The major averages peaked (intermediate term cycle high) in March 2002 (actually the major NASDAQ averages/growth stocks peaked (intermediate term cycle high) in December 2001 (NDX) and January 2002 (COMPX)) followed by a dramatic decline until the July 24, 2002 intermediate term cycle low when VIX rose above the extreme level of 50 (VXN to 69.75) and triggered a new intermediate term cycle (that ended when the October 10, 2002 intermediate term cycle low occurred). A similar dramatic decline is likely during the next few months.
The current low volatility/high complacency environment (VIX, VXN, and QQV near their lows for this intermediate term cycle which began on March 13, 2003 shortly after VIX rose above the very high level of 40) is characteristic of important tops wether they are short term, intermediate term, or long term tops.
For gold bugs the fact that the June 6’s NDX high (1265.69) is probably a cycle high for this intermediate term cycle (began March 13) is interesting because it probably means the gold stocks will rally another month or two since during the prior three intermediate term cycles gold stocks rallied for a month or two (even longer in one case) after an intermediate term cycle high occurred for the major averages as I discuss in more detail later.
Newmont Mining (NEM), probably the leading gold stock and a lead indicator for the group, broke out of it’s giant triangle pattern (going back almost exactly 1 year at the time of the breakout) recently and, because of it’s major long term breakout, has been acting well. NEM was up (yet again) 1.12% on Monday to 32.65 hitting resistance and fell 3.52% to 31.50 on Tuesday (typical vicious Bull Market selloff to correct an overbought condition) causing HUI/XAU to approach the bottom of their parabolic intermediate term channels intraday. Nothing unusual. NEM was hit by a JP Morgan downgrade on Tuesday which accounts for the dramatic decline intraday but it recovered significantly by session’s end.
NEM’s major long term breakout is a major positive for gold stocks and is probably a reliable leading indicator that the XAU will “slice” it’s giant triangle to the upside (near 79 now) in the near future which will be huge for gold and silver stocks. NEM is a good stock to day trade now or for investors to own but perform your own due diligence.
Also, silver is “locked” in a giant triangle pattern (past year or so) and should break out to the upside in the near future which means that silver stocks are worth a good look right now. Hecla Mining (HL) which I own and Pan American Silver (PAAS) which Bill Gates owns (last I heard) are two good silver stocks (perform your own due diligence) though Hecla is really about a 50/50 gold/silver mix now.
The US dollar (USD) was rallying in expectation of a 50 basis point rate cut by the European Central Bank on Thursday which temporarily weakened the Euro. The USD, as expected, sold on the news once (or shortly thereafter) the rate cut was announced on Thursday. That move gives the US Federal Reserve Bank room to ease further at their late June meeting if they deem it necessary and is a major positive for the precious metals/precious metals stocks.
Looking at last week’s “CFTC Commitment of Traders Combined Futures and Options” for gold (Reportable Positions as of June 3, 2003), the speculators (hedge funds and other speculators/traders) bought 13,189 long contracts and covered 4390 short contracts whereas the commercial traders bought a substantial 6811 long contracts but also added a dramatic 25,060 short contracts. The much more bullish posture of the speculators is a negative (contrarian indicator) but the commercial traders (non contrarian indicators (know what they’re doing)) adding a substantial number of long contracts probably indicates they don’t see a protracted downturn.
Looking at last week’s “CFTC Commitment of Traders Combined Futures and Options” for silver (Reportable Positions as of June 3, 2003), the speculators (hedge funds and other speculators/traders) sold 9565 long contracts and added 210 short contracts whereas the commercial traders bought a significant 1436 long contracts and covered a substantial 7287 short contracts. The bearish posture of the speculators is a positive (contrarian indicator) and the bullish posture of the commercial traders (non contrarian indicators (know what they’re doing)) is a positive.
For the US Dollar (USD) commercial traders (U.S. DOLLAR INDEX – NEW YORK COTTON EXCHANGE as of Tuesday June 3, 2003) sold 659 long futures contracts and covered 908 short futures contracts (delta = +249 contracts net long) which portends modest strength in the USD and is modestly bearish for gold in USD terms. The speculators (hedge funds and other speculators/traders) sold 434 long futures contracts and added 410 short futures contracts which is bearish (contrarian indicator) for the USD and bodes well for gold in USD terms.
For the Euro commercial traders (FX – CHICAGO MERCANTILE EXCHANGE as of June 3, 2003) added 2057 long futures contracts and added a substantial 12,912 short futures contracts which portends weakness in the Euro and weakness in gold in Euro and USD terms but nonreportable positions showed that 5611 short futures contracts were covered which offsets somewhat the substantial rise in short contracts for the commercial traders. Also, the fact that commercial traders added 2057 long futures contracts is a positive. The speculators (hedge funds and other speculators/traders) sold 434 long futures contracts and added 410 short futures contracts which portends strength (contrarian indicator) in the Euro and is bullish for gold in USD terms.
Intermediate term cycles tend to follow parabolic patterns, so the breakouts for HUI/XAU above their uptrending intermediate term channels recently wasn’t surprising. Interestingly, both HUI/XAU have now formed parabolic shaped intermediate term channels (basically connect the highs and lows since March 13 but maintain the original width from early in the cycle).
The XAU still has to contend with the top of it’s giant triangle formation (currently near 79) going back to the late May 2002 intermediate term cycle high before a major breakout occurs.
The stocks have been somewhat subdued for technical reasons such as the XAU’s nearly year long giant triangle pattern and HUI’s nearly year long (wide) trading range. Since the XAU is very near the end of the triangle, the moment of truth is fast approaching, and, given how favorable conditions are for gold now, isn’t the risk dramatically to the upside on an intermediate term basis (dramatic upside breakout likely soon)?
Given a year long trading range, a much higher gold price, and with the Fed about to, in all likelihood, soon cut rates in an attempt to boost economic growth which will hurt the US dollar and help gold, why are so many cautious right now? Also, as discussed below, on an intermediate term basis, gold stocks peaked long after the major averages in the preceding three intermediate term cycles. However, in the intermediate term cycle that began in early April 2001 the gold stocks hit an intermediate term cycle high at the same time as the major averages but gold was still in a long term downtrend (Bear Market) at that time.
In the last three intermediate term cycles gold stocks rallied for a month or two after the major averages hit an intermediate term cycle high. There was an intermediate term cycle high for the major averages in March 2002 and gold stocks exploded until the end of May 2002. There was an intermediate cycle high for the major averages in late August 2002 and gold stocks rallied well into September 2002. There was an intermediate cycle high for the major averages on December 2, 2002 and gold stocks didn’t peak until January with HUI hitting an intermediate term cycle high in early January and XAU peaking in mid to late January.
The NASDAQ 100 (NDX) hasn’t established an intermediate term cycle high yet (but June 6 appears to be the intermediate term cycle high at NDX 1265.69) which suggests gold stocks will rally well into June and possibly into July or August on an intermediate term basis.
Gold experienced an intermediate term cycle low (near the bottom of it’s uptrending price channel) on Monday 4-7 with a session low of $319.20. Gold fell a bit below the bottom of it’s “hidden channel” on Monday 4-7. It appears that seasonality (linked to gold’s cycles) may be a major factor for gold stocks with huge rallies culminating in intermediate term cycle highs in late May during both 2001 and 2002.
On Monday there was an unusual rise in gold stock fear since XAU (Philadelphia Gold and Silver Index) IV (Implied Volatility) Index composite rose 6.74% to 31.99% (from 29.97% on Friday: +2.02%/29.97% x 100%) versus the XAU falling 0.47% that correctly portended weakness on Tuesday (XAU in negative territory the entire session with a session low of 74.15 and closed significantly lower at 75.64, -1.08, -1.41%.) because (the gold stock wall of worry grew dramatically) XAU implied volatility rose dramatically in percentage terms versus the XAU falling modestly.
On Wednesday there was a significant rise in gold stock complacency since XAU (Philadelphia Gold and Silver Index) IV (Implied Volatility) Index composite fell 3.00% to 30.43% (from 31.37% on Tuesday: -0.94%/31.37% x 100%) versus the XAU rising 1.45% that portended weakness on Thursday but the session was newsdriven with a sharp USD selloff following the ECB’s 50 basis point rate cut causing gold to be strong in USD terms (XAU in positive territory the entire session and closed much higher at 77.70, +2.60, +3.46%.) because (the gold stock wall of worry shrank) XAU implied volatility fell very sharply in percentage terms versus the XAU rising significantly.
I’m now calculating the XAU Put/Call Ratio as opposed to using Bernie’s put/call ratio for ten gold stocks, which, for the June 20 expiration, is at 0.65 on Tuesday from 0.66 on Monday (0.60 on Friday June 6, 0.63 on Thursday June 5, 0.61 on Wednesday June 4, and 0.55 at Friday May 30’s close) which probably portends strength on Wednesday because, while it declined, it only declined 0.01 after an unusually large 0.06 rise on Monday, so it remained high which is akin to a rise or a very sharp rise in fear. The unusual rise in fear from 0.60 on Friday June 6 to 0.66 on Monday June 9 correctly portended weakness on Tuesday.
As I say below the XAU Put/Call Ratio appears to be acting as a contrarian indicator BUT an unusual rise in fear with a contrarian indicator usually portends weakness (non contrarian case for contrarian indicators) and an unusual rise in complacency portends strength though I don’t do anything mechanically in my work/system. One should always use all relevant indicators, tools, info, technical condition, wether the intermediate term cycle is heading up or down, etc. At times “keen analytical judgement” is involved.
I need to observe this indicator for a while to establish/see if it’s contrarian or non contrarian. The XAU Put/Call Ratio was at 0.55 on Friday May 30 and rose to 0.61 by Wednesday June 4 which portended major strength on Thursday June 5. The decline to 0.60 on Friday June 6 portended weakness on Monday with HUI/XAU modestly lower. It appears the XAU Put/Call Ratio is a contrarian indicator but I need to gather more data to establish a statistically meaningful sample size.
HUI (AMEX Gold Bugs Index) stochastics, RSI, MACD, and ROC are on a buy signal now but the XAU tested major long term resistance last week (near the top of it’s giant triangle) which led to weakness in recent sessions. HUI is on a short term buy signal. As long as HUI remains in it’s intermediate term uptrending parabolic shaped channel it’s technical condition is positive (intermediate term buy signal/uptrend).
The very high HUI volatility on Friday 3-28 is characteristic of bottoming activity and exceeded that of the intermediate term cycle low that occurred on October 10, 2002.
Keep in mind that the metal lags the gold stocks on a long term (and apparently intermediate term basis with an intermediate term cycle high in early February versus the stocks peaking in January and an intermediate term cycle low on April 7 nearly a month after the stocks hit an intermediate term cycle low on March 13) basis. The metal recently had an enormous rally from the $300/Ounce area to about $388. It played catchup with the HUI which is a good sign (HUI rose 70-75% in both 2001 and 2002, outperforming the metal, and began it’s Bull Market in late 2000 about 5-6 months before the metal).
A gold stock Bull Market (The New Bull Market!) began in late 2000. I suspect there will be a huge rally in the next few months (an intermediate term buy signal occured on Friday 3-28 with HUI rising 7.91%) as occurred in 2001 and 2002 this time of year. Short covering will be a major factor because the gold stock market is still a relatively small one.
Look for gold to trend higher this year and long term. $330.00, a major resistance level, was broken on Thursday 12-12-02. There might be a lot of money to be made in the gold stocks during the next few weeks but keep in mind they tend to be extremely volatile as they have been recently. The 50 basis point Fed rate cut at the November 6 FOMC is a major positive for gold stocks. The rapid growth in the money supply is a major positive for the precious metals. The Fed is in the unenviable position of having to inflate (decrease the dollar’s value) in order to keep the economy afloat.
Thursday 12-12’s major breakout above $330/ounce confirms a likely long term Bull Market for gold and is a major long term buy signal.
At early February’s intermediate term cycle high gold volatility became very high which correctly indicated there would be a major move down. The spike up in volatility accompanied the very sharp rise to the $388 area and correctly identified an intermediate term cycle high in gold. It appears that extremely low volatility marks gold bottoms and extremely high volatility marks important tops which is the opposite of what happens with the major averages where extremely low volatility marks tops and extremely high volatility marks bottoms on both a short and intermediate term basis (The extreme cycle low on 9-21-01 occurred at an extreme of volatility that saw VXN rise above 91. A sell signal occurred in March 2002 when VXN fell below 40 because it indicated that an extreme of low volatility was near. All the major averages (growth and value) began trending lower at that time though the major NASDAQ averages began trending lower in early January because growth stocks hit a cycle high at that time.).
It appears the market may be heading for another short intermediate term cycle (began on March 13 when VIX hit 40 but VXN was at a very moderate level of 43) such as began on July 24, 2002 and October 10, 2002 when VIX rose above the extreme level of 50.00. So, I’ll be looking for another important cycle low when VIX reaches 50+ (and/or if VXN reaches the extreme level of 80+).
VXN is new as of January 2001 so not enough data exists yet to be a statistically meaningful sample size but identifying major deltas in fear (Delta VIX/VXN) and peaks in VIX/VXN can identify likely cycle highs and lows. The principle of a major rise (delta) in fear or complacency leading to major rallies/declines in the major averages is a sound one as is the degree that fear or complacency creeps into the market as it rallies/declines (how well the wall of worry holds up) portending strength (when fear creeps in) or weakness (when complacency creeps in). This chart of the percentage moves in VIX and VXN versus the S & P 500 (SPX), the Dow (DJIA), and the NASDAQ Composite (COMPX) illustrates that sound principle of market timing.
Two extremes of fear (VIX hit the extreme level of 50+ on 7-24-02 and 10-10-02 and VXN rose to moderately high levels of 69+ and 64+ respectively on those dates) in 2002 led to (triggered) intermediate term cycle lows. When VIX and VXN both exceeded extreme levels (of 50 & 80 respectively) on 9-21-01 (VXN hit 91+) a healthy long intermediate term (6 month+) cycle ensued (an extreme intermediate term cycle low/major bottom occurred).
Value stock volatility (VIX, OEX Volatility Index, is mostly value stock volatility because the S & P 100 appears to be about 75-80% value stocks. VIX largely reflects value stock volatility) is running ahead of growth stock volatility as it did when the July 24, 2002 and October 10, 2002 intermediate term cycle lows occurred with VIX at a low level (between 20-25) at 22.13 as of Tuesday’s close and VXN at a very low level (below 40) of implied volatility/fear at 34.00. For VXN to be at a “high” level of implied volatility/fear it would be at or above 60 which is where it was (at 64+) when the October 10 (the second “VIX 50.00” moderate cycle low in 2002) intermediate term cycle began. Growth stocks are much more volatile than value stocks hence the differing levels for “high” implied volatility, “very high” implied volatility, etc. for VIX and VXN.
The disparity between growth and value stock implied volatility/fear is “preventing” an extreme cycle low by triggering an intermediate term cycle low before NASDAQ/growth stock implied volatility/fear (VXN/QQV) becomes extreme (occurred twice in 2002). I think VXN must at least reach 75 and probably near or above 80 before an extreme cycle low can occur. It reached 91+ when the last extreme cycle low on 9-21-01 occurred as I’ve discussed previously. It also spiked above 80 when the April 2001 cycle low occurred. We got another “VIX 50.00 rally” (moderate cycle low) on 10-10-02 and a very moderate cycle low on March 13 when VIX rose to 40ish but VXN was only at 43ish.
The moderate intermediate term cycles after the July 24, 2002 cycle low (and after the October 10, 2002 and March 13 cycle lows) strongly supports my view that VXN must approach or exceed 80 as it has in recent intermediate term cycle lows (growth stock fear must become extreme) in order for a true extreme cycle low (major bottom) to occur.
At true extreme cycle lows fear becomes much more extreme than it did on 7-24-02, 10-10-02, and 3-13-03 (VXN at about 70 on 7-24-02, at 64 on 10-10-02, and at 43 on 3-13-03. Spiked to 91+ at the September 21, 2001 cycle low and well above 80 when the April 2001 cycle low occurred). Also, complacency doesn’t creep back into the market as quickly as it did during the recent moderate intermediate term cycles after 7-24-02, 10-10-02, and 3-13-03. In other words, buckle up!
People who mechanically rely on one indicator such as VIX tend to get into trouble. This is why I look at a variety of primary indicators such as VXN, QQV, VIX, Advance/Decline Ratio, Up/Down Volume, total volume, money flow, Investor’s Intelligence survey of advisor bullishness, etc. I would call the July 24 and the October 10 Bear Market lows moderate intermediate term cycle lows because VIX reached an extreme level of 50+ but VXN fell well short of an extreme 80+ (it rose to about 70 on 7-24-02 and 64 on 10-10-02. Spiked to 91+ on 9-21-01).
Intermediate term cycles tend to be 3-12 months in duration in recent years. There were two intermediate term cycle lows in 2001 (April and September) with September 21, 2001’s being a major bottom (extreme intermediate term cycle low where VIX > 50 and VXN > 91 on 9-21-01).
Since there was an enormous rise in complacency during the intermediate term upcycle after the March 13 very moderate (VIX rose to a respectable 40+ but VXN only rose to 43+) intermediate term cycle low (VIX, VXN, and QQV fell dramatically), the primary growth stock indicators portend an intermediate term cycle high in the near future (may have occurred on June 6).
Breadth, a primary fundamental indicator, was very positive on Tuesday with NASDAQ A/D at 20:11 in favor of advancing issues and NASDAQ Up/Down Volume was in favor of up volume by nearly 3:1. Once the cycle low occurs and a new upcycle begins breadth should turn convincingly positive during the early high fear part of the cycle. Growth (NASDAQ is mostly growth) will be more timely than value (NYSE is mostly value) but both should rise sharply during the early high fear (VXN > 60, VIX > 30) part of the cycle.
VXN is at 34.00 as of Tuesday and I expect it to briefly spike above 80 and possibly even 90 the day an extreme cycle low (major bottom) occurs. It’s likely that will be the only day that VXN spikes above 80, especially if it rises above 90. The more extreme fear becomes the more likely a “V” shaped cycle low occurs as opposed to a “W” shaped retest cycle low occurring probably as a result of a more moderate peak level of fear. VIX (OEX/value stock implied volatility) reaching 50+ is another likely indication that an intermediate term cycle low will occur (be triggered by an extreme of fear) soon, but is a much less extreme cycle low than when VXN (growth stock volatility) reaches 80+.
A great trading opportunity may occur in the next few months. Keep in mind that from the September 21, 2001 COMPX intermediate term cycle low of 1387 to the intermediate term cycle high in early January 2002 of about 2100 COMPX gained about 50% in three and a half months. So, a very nice gain will probably result if one buys QQQ near the cycle low and exits once a complacent, fairly low volatility market arises.
One needs to keep in mind that the sentiment picture can change drastically in a few hours or even less from what I discussed using the previous close’s sentiment figures. It’s important to look at VXN intraday and compare it to the figure I discuss from the previous session’s close. If fear rises substantially (large + Delta VXN) that portends a rally and if complacency jumps (large – Delta VXN) substantially that portends weakness. An unexpectedly large jump in fear or complacency can dramatically change the very short term sentiment picture.
It’s important to remember that when capitulation becomes a major factor that fear/volatility (VXN) can rise dramatically and though that normally would portend a nice rally, a lag time arises and one has to wait for the cycle low to go long QQQ once serious capitulation begins. The steep drop and quick snapback at NASDAQ cycle lows tends to form a V (a retest of the cycle low is a possibility also which is a W).
I suspect that the more extreme fear/volatility becomes (VXN spiking above 90 to 91+ as it did on 9-21-01 when the last extreme cycle low (major bottom) occurred) the more likely a “V” will occur and a more moderate peak level of fear/volatility (VXN spiking well above 70 but failing to reach 80) greatly increases the likelihood of a “W” pattern (retest and potential double bottom formation) cycle low occurring.
The moderate level of implied volatility/fear has a high correlation with a moderate level of volatility. Daily moves in COMPX on the order of 2%+ aren’t surprising. Volatility (VXN) may rise sharply in the next few sessions because the intermediate term cycle is heading down and implied volatility (fear) tends to rise as the market falls.
If you buy QQQ at the wrong time you might experience substantial downside. Buying very near the cycle low takes nerves of steel and is only for highly skilled traders due to the extreme volatility. Don’t try this at home unless maybe you are a highly skilled trader or you can live with a great deal of risk. For neophytes IF you try to trade the gold stocks or QQQ (or any highly volatile stock) you should only be using a modest amount of risk capital and should have a risk mitigation strategy.
Joe Ferrazzano,
joefrocks@aol.com
http://www.joefrocks.com/
Joe Ferrazzano is the Market Strategist and Stock Analyst for (as well as the creator of) Joe F. Rocks! Growth Stock Investor & Market Strategist (http://www.joefrocks.com/), a market timing service (as well as a “destination” site) which times 2-3 day intervals, 2-3 week intervals, 3-12 month intervals (Intermediate Term), as well as long term timing (Transitions between Bull/Bear markets). Joe also discusses the next trading session, especially concerning what type of action to expect early on. Joe’s methods of analyzing various sentiment indicators to help time the market and to time growth stocks as well as value stocks was devised nearly entirely by Joe himself and is founded on the sound premise that substantial increases in fear tend to lead to growth stock rallies and substantial increases in complacency tend to lead to growth stock weakness. Joe uses many indicators in addition to sentiment indicators such as money flow, the NASDAQ Volatility Index (VXN), the NASDAQ ARMS Index (TRIN), Advance/Decline Ratio, Up/Down Volume Ratio, Relative Strength Index (RSI), stochastic, etc. The market’s cycles from extreme fear at cycle lows to extreme complacency at cycle highs are a major factor in Joe’s work. Joe F. Rocks! Growth Stock Investor & Market Strategist is a market timing service as well as a “destination” site that has won rave reviews from countless readers around the world.
