Tuesday, April 15, 2003 9:40 PM EST
I don't have much to add tonight beyond what I outlined this weekend and in the intraday notes and portfolio changes. The market has been acting relatively well technically, but from a sentiment standpoint there's no reason to believe this rally is any different from the dozens of others over the past three years.
This weekend, I pointed out the low absolute level of the STEM model. It was 23% at the time, and as of tonight's close, it has dropped to 20%. This is only the third time in three years that the model has reached this level. The first time was 7/17/00, which lead to an immediate 5.6% decline in the S&P over the next month. The second was 1/7/03, which lead to some erratic movement over the ensuing weeks before the steady decline into February and March. I prefer to compare the model to recent history on a relative basis, but when any model or indicator reaches such an extreme absolute level (as well as relative level), I think it begs our attention.
I was asked a couple of times today about the spike lower in the VXN. I do believe it has the potential to be a bearish development, but it's hard to read too much into the indicator with its short history. The VIX and VXN have a very close correlation, and as I said this weekend, the VIX is oversold in an historical, statistically meaningful way. Such a low uncertainty gauge, combined with the low relative volume and lack of volatility we've seen, all point to a complacent market that is going through a topping phase.
The confluence of extreme readings we've seen in many of our indicators continue to suggest that this rally should be sold into, not bought hoping for a breakout and continuation. Virtually every trader I talked to today is focused on the 905 level on the S&P, and the futures flirted with that level in the Globex session tonight. Should we clear that hurdle, we could see a violent spike as stops are hit at varying levels (including ours in the short-term model portfolio), so be careful trading around that number. If we do clear it and are able to hold, that could encourage buyers to come in and power us higher regardless of overbought levels. If we are able to hold, I would look to become aggressively short again around 930/940. I have no interest in looking at long positions in this sentiment environment as the risk/reward does not support anything other than an intraday scalp trade from the long side.
- Jason Goepfert
Disclosure: long OEX puts
This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.
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