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Tuesday, January 27, 2015

Daily update 1/27 Volatility research

Dip buyers showed up once again on the big gap down.  I think there were not a lot of people wanting to sell into the weakness which allowed the market to float up.  Sellers did attack some in the afternoon.  Here is the SPX chart.

SPX retraced the ECB QE announcement pop.  It closed well below the 18 and 50 SMAs.  Breadth was only 55% negative despite SPX being down over 1.3%.  Very odd.  More money was moved toward smaller cap stocks today.  There were 296 new highs and 49 new lows.  That is an odd amount of new highs for such a big down day.  This is a messed up market.  The breadth is pretty good and the new highs are really good, but we are not higher.  What gives?  Lets look at the futures chart.

Overnight the futures sank back below the 100 SMA.  They probed down below the 50, but found no sellers down there.  Then they floated back up to the 100 before selling off again.  After the close they popped yet again back up to the 100 SMA and are still there as I write this.  I see AAPL was up over 5% on their earnings.  That might be the reason for the pop.  This chart is getting sloppy now.  The MACD has turned down and the DI lines have a negative cross.  However, price is sideways and not really down, at least not yet.  Will the futures still be up by morning?  If they are will sellers show up?

This market continues to be volatile and choppy.  That is pretty much the worst kind of market for anybody but day traders.  I don't think we are going to go down significantly as long as there are well over 200 new highs every day.  While there are plenty of dip buyers, investors seem to hesitate to push prices higher.  In order for the market to move significantly higher people will need to get more aggressive.  Will earnings be good enough to cause that to happen?  I guess we will see.

Tomorrow is FED day yet again.  There is no action expected.  However, I am sure the statement will be parsed to death.  I have no idea what they will say or how the market will react.  We are trendless at the moment.  Not much edge in trying to predict what will happen.  Maybe tomorrow night things will be clearer.

Some research that comes out of Wall Street is top notch and very useful.  However, there is also a lot of stuff that rather poor.  I saw this table today and it seems at least a little misleading.

One important piece of data that is missing is the maximum drawdown from the high.  The data in 1998 looks pretty innocuous, but that time period saw SPX down nearly 20% from its high.  Why was 1993 chosen as the starting date for the study.  That seems like a very odd year to me.  My guess is that if you went back further in time the data might not look as positive, but that is just a guess.  Starting dates can definitely change the outcome of a study and are often chosen to present the picture the author most wants everybody to see.  While this study shows the market up nicely most of the time 1 year later there is the matter of the 2000 and 2007 tops being in the table. The full magnitude of the near 50% decline after 2000 is completely masked.  The Oct. 2014 period saw very nearly a 10% pullback in SPX which is also masked.  Exactly what can we really infer from this table?  From what I can see this spurt in volatility can range from being nearly totally meaningless to a full blown 50% crash.  How can we tell the difference?

I have to change the short term trend in SPX and COMPX to neutral tonight.  The R2000 trend remains up.


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