Technically Speaking: The "Low Rate" Trap

Low-Interest Rate Trap

In this past weekend’s commentary, I discussed the failure of the market to hold its breakout above 2100 last week.

“The short-term outlook suggests more vulnerability to selling. Importantly, the markets must hold support at 2080, the short-term moving average, or 2040 which is the recent bottoms of what currently appears to be a potential topping process.

The failure of the markets this week to break, and hold, above 2100 keeps portfolio allocations at current levels.As shown below, the downtrend resistance, on a weekly basis, also coincides with 2040 reinforcing the importance of that support level. Stop loss levels are current set at 2020, and portfolio hedges will be added with a subsequent break of 2000.”

SP500-MarketUpdate-061416

 

The sell-off that started on Friday and continued through Monday also coincided with a sharp rise in market volatility. While the pop in volatility has been more of the “norm” in the markets since last May, it is the rising trend of volatility that concerns me.

SP500-MarketUpdate-061416-3

 

As shown above, when volatility TRENDS higher, it has generally been an “early warning” of a market in the midst of a topping process.

The chart below is a little different look at volatility by measuring the ratio between the short and mid-term volatility futures. As shown, when the VIX has turned up, coincidently pushing the short/mid-term volatility ratio down, it has generally coincided with a correction in the markets. Given the recent ramp up in the volatility ratio, the current correction likely has further to go.

SP500-MarketUpdate-061416-4

 

Lastly, as shown in the next chart, the number of stocks above their respective 50 and 200 day moving average have started to decline with the ratio of bullish/bearish sentiment at bullish extremes. Historically, the combination of these two measures of “bullish bias” have led to a period of consolidation or correction in the markets. 

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Streettalk Advisors, LLC expressly disclaims all liability in ...

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