SPX Through 11-6-09

Equity-only put-call ratios appear to still be feeling the effects of the heavy hedging activity that took place this summer and fall. For the record, the standard ratio is on a buy signal, while the weighted ratio is on a sell.

Market breadth has been a reliable indicator during the rally since the March bottom. The recent correction saw our breadth oscillators reach extremely negative, oversold levels. This week, however, breadth has generally been positive, culminating with a very strong showing of advances over declines today.

VIX Through 11-6-09

We view the current market as bullish. We would expect $SPX to exceed the resistance at 1070 (it would be bearish if that resistance held) and challenge the highs at 1100. The wild card is today’s Unemployment Report; if it is negative a $SPX falls back from here, then it would be in a trading range between 1030 and 1070 and we’d have to await a new breakout at a later time. [At 3 PM EST, with an hour to go, the S&P is flat.]

SPX Through 10-2-09

For the first time since the July lows, $SPX has etched a lower high, lower low pattern. This might not be the start of a serious downtrend, but it is certainly a “warning shot” of sorts. On the first trading day of September, the market plunged and then rallied strongly. The bulls hope that will happen again here in October, but the technicals are not as favorable now as they were a month ago.

As far as the $SPX chart is concerned, there are several levels of support which are important. The first level is where $SPX is right now — at 1030. That is where the market topped in August. Below that, there should also be support at 1010, and then 980-990, at the August and September lows. As for resistance, the major resistance is the 1070 level. Any close above there would put the market back in full bullish mode.

Equity Only Weighted Put Call Ratio Through 10-2-09

The equity-only put-call ratios remain on sell signals. Market breadth has been very strong all along since March, but has now turned negative,as declines have outnumbered advances on 7 of the last 9 trading days. As a result, sell signals have been registered.

VIX Through 10-2-09

In summary, a correction is underway, and it is minor so far (40 $SPX points). So far, indicators have reacted modestly to the decline, as they are expected to do. However, if $SPX 1010 is violated, and if $VIX continues to trend higher, then a more bearish outlook would be warranted. On a more positive note, if $SPX holds at support and perhaps true buy signals are generated by the breadth indicators, then the bulls would assume control once again.

Overhead Resistance in SPX

The problem with these bullish projections is that the market is extremely overbought — so overbought, in fact, that if history is any guide, it will stall out here for a while. You may think that sounds almost impossible, for the market to stall after having just broken out, but the same thing most recently happened on June 1st, so there is precedent.

Put Call Ratio through 24 July 2009

Weighted Put Call Ratio 7-24-09

VIX Through 7-24-09

In summary, the upside breakout looks to be an “all clear” for the bulls. And, in line with the 1938 chart, we expect $SPX to now move to its eventual highs above $SPX 1000. However, since the market is so extremely overbought, this move may once again be stalled as the overbought condition is worked off via sharp, but short-lived declines and/or sideways action.

SPX Through 10 July 2009

Put Call Ratio 10 July 2009 with OEX

The equity-only put-call ratios continue to rise and are thus still on sell signals. Since they started from such a low point on their charts, they have a long way to roam on the upside before we would consider them “oversold.”

Weighted Put Call Ratio with OEX

Market breadth turned decidedly negative in the last week, as the market sold off, but have now reached oversold status. However, “oversold” does not mean “buy.” So until these generate true buy signals — which they would do with one more day of advances leading declines — we consider them as still being on sell signals.

VIX with Trend Line 7-10-09

In summary, the bulls may attempt a rally here, but we would not expect it to be particularly robust — probably just enough to work off the oversold condition in the breadth oscillators. Thereafter, unless the indicators quickly change, we expect a downside breakout to occur.

The bulls had just about everything going their way, but they really didn’t do much with it, and now momentum has swung swiftly and strongly in favor of the bears.

SPX Through 2nd July 2009

At this point in time, the $SPX chart still shows major resistance at 950 and major support at 880. We had said before that we thought the bulls would defend the 880 level and they did so strongly — for a while. They bought early, as we thought they might, when the market bottomed at 888 a week ago Monday. Since then $SPX rallied strongly at first, and then weakly, eventually reaching 930. But in just over one full trading day, $SPX is all the way back down to 896. I think that, this time, a full test of 880 is in order.

Put-Call Ratio 2nd July 2009

Weighted Put-Call Ratio

Equity-only put-call ratios have stayed bearish throughout the recent rally. Since they are our most trusted intermediate-term indicator, this is significant.

Market breadth has been the most volatile indicator. Buy signals were issued over a week ago, followed by sell signals this week. The buy signal was a “true” buy signal in that breadth reached oversold levels before the buy signal was issued. Those have been especially strong buy signals this year. To reach that status again would require declines to dominate advances for at least three days, by which time it might be too late — $SPX 880 might be violated by that time.

VIX with Trend Lines

Volatility indices have continued to decline, and thus remain one of the strongest bullish indicators. Even today, with $SPX down sharply, $VIX didn’t rise very far. $VIX won’t turn negative unless it closes above 30. Even then, it could be a false breakout as the probe above 32 was in mid-June (blue line in Figure 4).

In summary, $SPX is still within its wide trading range of 880 to 950. If breakouts occur beyond those prices, they will likely be tradeable.

Case-Shiller Housing Index Through April 2009

There is great variability between the cities.  Here are the results for each city in the index:

It would be great to hedge the value of your house so that further declines would be made up by an increase in a security. Well, MacroShares launched two Exchange Traded Trusts on 30th of June that track the ten city composite.

Or do they?

MacroShares Major Metro Housing Up (UMM) and Major Metro Housing Down (DMM) return three times the index and minus three times the index. But not month to month. They are designed to return the given multiple of the index in November 2014. Until then, they will fluctuate depending on investor sentiment.

Another interesting feature is that they transfer money between themselves based on the relative price. As more money comes into the funds, they buy Treasuries that they transfer depending which Trust is higher.

If they had launched in 2006, DMM would already be shut down, because the 10 city composite peaked at 225 and now it is at 150.  A 1/3 drop wipes out the Trust.

Because the trusts move to plus and minus three times the Case-Shiller index in five years, they can be used as a five year hedge for your house value.  If you sell your house before then, there is no guarnatee that the Trusts will reflect the change in housing prices.  They act like a warrant, trading on what investors expect housing prices to be on 31st August 2014, payable in November 2014.

Below are all the post-holidays since 1950 with gains of more than +2%, sorted by return.  Notably, on the day following the dates below, the S&P was positive only 35% of the time, but the declines tended to be extremely small with only 2 of the 9 being larger than -1%.