First off, I would like to say thank you once again to all of those who attended OASIS 2008 this past weekend. As an instructor there is nothing more that can be asked for than an audience that is ravenous to learn. So my thanks to all of those who attended and particularly to those who attended the sessions that I taught. By special request I have included at the end of this piece, the “Top 10 Breakout Session Topics That Did Not Appear at OASIS 2008." One caveat to those who were not there – you had to be there.
At OASIS I referred to myself during a number of conversations as “the only guy I know who is bullish on the stock market." And of course I stand by that statement – well, at least until I don’t (i.e., if the January low is taken out). I made that statement based on an overall anticipation (i.e., hope) that based on several bullish seasonal trends and, and the overwhelmingly gloomy “wall of worry” currently facing the stock market. That being said, the purpose of the “bullish” statements was to try to take people’s attention away from the universally dismal headlines and attempt to focus on the bigger picture. In the short-term the market remains something of a major “muddle."
On the bullish side, Chart 1 displays the growth of $1,000 invested in the Dow Jones Industrial Average only between May31st and December 31st of every election year since 1900. Clearly this is “typically” – not to be confused with “always” – a bullish period for stock prices.
Chart 1 – Growth of $1,000 invested in Dow only between May 31st and December 31st of Presidential Election Years
Chart 2 displays the Dow Jones Industrial Average with the January low highlighted by a horizontal line and the start of the typically bullish “late decade rally” (February 29) and the typically bullish “mid-to-late election year rally” (May 31st) highlighted by “up” arrows. These two seasonal trends suggest a potentially more favorable investment “climate” and underpin the reason I am presently anticipating that the January low will hold.
Chart 2 – Dow Jones Industrial Average with January low and start of favorable seasonal periods highlighted
In the meantime there is reason to expect something less than “a complete and total bull market." The present uncertainty regarding banking, housing, crude oil and unemployment has been accompanied by sell signals in some of the sentiment indicators that I follow. The ProfitSource Oscillator indicator for the VIX Index recently “rolled up” from a low, which is typically accompanied by a pullback in stock prices as you can see in Chart 3.
Chart 3 – “Rollups” in the VIX Index Oscillator tend to presage pullbacks in stock prices
In a nutshell, I remain bullish unless and until the January low is taken out. Given the recent action of the VIX however, I do think that more “base building” is likely in store and that another retest of the January low is quite possible. Nevertheless, I am of the mindset that investors should be looking at near-term weakness for buying opportunities.
Here are four things to keep an eye an eye on:
1) The January Low – this one is fairly obvious. As long as prices hold above that low one can make a bullish argument. If that low is taken out in any meaningful way, then it is a whole new ballgame.
2) A Meaningful Spike in the VIX Index – As you can see in Chart 4, the VIX did spike higher on 6/6. Nevertheless, most of the VIX related indicators that I follow would require a bit more before turning bullish once again. So look for some real “fear” to appear before the market stages any kind of a meaningful upleg.
Chart 4 – VIX Index: a meaningful rise will likely accompany next buy signal
3) Retracement levels – I am not a huge “Fib” guy, but in Chart 5 you can see that the market retraced 61.8% (a major Fibonacci number) of the January to May advance. It would be significant if the market could hold above 12,200, but the fact remains that given the present investor gloom and plethora of uncertainties, a retest of the January low is a distinct possibility.
Chart 5 – Dow retraces 61.8% of January to May advance
4) The Trend of the Price of Crude Oil – The trend of the price of crude is the number one topic in the financial markets today. Virtually every projection out there suggests higher – and possibly significantly higher – prices in the days and weeks ahead. While I tend to be wary of “consensus” views I nevertheless do not presently possess the – um – “kahunas” to fade this market. Still investors should keep a close eye not only on the price of crude oil itself but also the indicators associated with crude to see if any of the recent price/indicator divergences continue to hint at a waning trend.
In Chart 6 you see the huge run up in crude on 6/6, accompanied by a number of potential price/indicator divergences. Please understand that these divergences do not suggest that everyone should rush out and sell short crude oil futures. This does point out however, that traders need to look beyond just the latest breathless headline to figure out the full story.
Chart 6 – Crude Oil spikes higher, indicators diverge. Significant?
Summary
So what does it all mean? The stock market drew a “line in the sand” back in January. It is now presently in the process of attempting to defend that line against a whole host of bad news and outside influences. Should investors sell now and avoid the rush later? Or should any near-term weakness be viewed as a buying opportunity?
As always, time will tell. In the meantime the best counsel might be to paraphrase that age old adage, “patience, uh, gentleman, patience”
The Top 10 Breakout Session Topics that Did Not Appear at OASIS 2008
#10: Gann for Normal People
#9: Straddle Strangle Swap Be-Bop
#8: Dislocated Collarbone Butterflies
#7: Demystification of Option Geeks
#6: Risk Management: The Musical
#5: How FOREX Bank Traders Find Good Bars
#4: Jelly Rolls – Let’s Go Get Some Right Now
#3: Stops are for Wusses
#2: Jay’s 9/30 Moving Average Crossover System
#1: Squeezing the Juice Out of Market Maker Brains using Tight Collars
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Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
