The trend, discussed in an earlier post on diminishing market sensitivity, continues…while the market has seen 350+ point swings (2% for the DJI) in the past couple of days. As in Fig. 1 above, VVIX is declining for rising peaks of VIX, the SP500 volatility or fear index. A divergence in market terminology.
I’ll stick with my short-term theory that given diminished sensitivity to fear, VIX too must settle, but must confess to a rising concern with less than impressive quarterly earnings numbers from financial giants such as JP Morgan, and weak retail sales numbers for the past December. An expected upward turn for the market can reverse with rapidity if more earnings numbers (from Bank of America, and Intel Corp. expected Thursday) and forward guidance fall below significantly lowered expectations for earnings growth.
To bolster the expectation of a market rise near-term, here’s the SP500 chart with some technical analysis:
As seen in Fig.2 above, the SP500 index has bounced off close to the 100-day simple moving average (SMA) on a good few instances in the past six months. The non-monotonicity of the moving averages convergence divergence (MACD) analysis (in red), at the end of the plot in the past couple of trading sessions, hints at the possibility of its crossing the signal line (9-day exponential moving average of the MACD) upward – a BUY signal in simple technical analysis. This wiggle in the MACD corresponds with the market having opened up strongly positive on Tuesday and being pulled negative by a combination of news and concerns.
Could the SP500 bounce mid-January, given that it is at the 100-day SMA level, and has held above the psychological 2000 level? Perhaps…today’s trading session saw the market fall 2%, and retrace half that fall in the afternoon (an afternoon spurt up in oil price may have something to do with that). A candlestick SP500 plot shows a bottom hammer formation, an indicator of a turnaround. But, in a fearful situation (higher average VIX values) such as the present, negative economic data, or unimpressive earnings numbers, among other factors, can readily overwhelm any of the technical indicators seen, as experienced traders know…
Full Disclosure: I continue to stay short the VIX near-term.