Market Talk

Don't put all your picklin' jars on the same shelf.

Given that equities have risen for nine months running without so much as a 10% correction, any little hiccup is going to make people nervous. (It makes some other people think the whole thing’s a rigged game, but that’s another story.) At some point, a correction is inevitable. The only questions are when and how large will it be, and the longer it takes to appear, the more severe it’s likely to be.

With stocks getting off to a rough start here after Alcoa’s big earnings miss, the question is already alive, if not kicking very much.

“While each camp can produce plenty of evidence supporting their views, I am unable to say either side is convincing,” Barry Ritholtz writes at The Big Picture. “There simply is not enough data to make the call that the run which began in early March is over — at least not yet.”

Since about mid-November, the stock market has been more or less flat, albeit while inching along to marginal new highs. This has led some to conclude the market’s out of breath, or out of energy, or out of something. Meanwhile, stocks keep hitting fresh highs, and the situation can create some amount of agita. Something, at some point, has got to give.

From John Hussman:

As I’ve noted frequently, when market conditions are characterized by unfavorable valuations, overbought conditions, overbullish sentiment, and upward yield pressures, the market’s tendency is exactly that – to make continued marginal new highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere. Being defensive in that situation can make each slight new high feel excruciating, even if the market is not making much net progress.

The present overvalued, overbought, overbullish, yields-rising conformation holds us back from accepting market risk here in any case. But the market is quite likely to clear this condition in one way or another over the next few months, most likely with an abrupt decline.

But the bulls are still laughing all the way to the bank, as they say. Bernie McSherry (going off on an extended Led Zeppelin reference-fest in the process) has this to say today in his daily comments:

The only head-banging being done these days is by investors who missed the great rally of 2009 and as the market continues to grind modestly, yet inexorably higher, traders are finding that in the early days of the new year the song remains the same as it was in late December.  If stocks can sustain these gains as we move deeply into the depths of a brutally cold winter, how long will it be before investors decide that dancing days are here again and send the market another leg higher? The next couple of weeks may provide the answer.

Of course, the real smart money got out of stocks in 2007, side-stepping the crash of 2008, and making the rally of 2009 nothing more than a curiosity. But that’s another story.

Now, everybody’s been making hay out of the VIX, the so-called “fear gauge” that measure options volatility. It’s been down so far every day this year, to levels not seen since April 2008 (when it was, incidentally, on its way up, not down.) But it’s also brought the VIX to near a rare technical sell signal, according to Robert McHugh of Main Line Investors (which comes to us via UBS’ Art Cashin.)

The VIX, he notes, fell through “its bottom-boundary two-standard-deviations Bollinger Band Monday.” (For more on Bollinger Bands, go here.) He notes other sell signals were triggered in September 2007, February 2008 and May 2008, and each one led to a big selloff. Yesterday, the VIX closed at 17.55, with the Bollinger Band at 17.70. What you’d have to see next is a move back above that lower band, and with the VIX up 4% this morning at 18.29, that’s happened,

“Are sell signals in the VIX reliable and significant? Oh, yes they are. Sell signals from the daily VIX are rare.”

For more on this, the Evil Speculator lays out the ground rules of this sell signal, and adds “the sell signals are far more accurate than the buy signals” and if the signal is actually coming, it’ll come in the next two days.

Prudence, as always, is warranted.

(Photo: wikipedia commons)