Tuesday, January 8, 2008

Arrow Up For Tomorrow

I generally shy away from making stock market predictions and prefer the Stuart Walton jellyfish approach to investing, but sometimes the markets get so egregiously out of whack that I feel obliged to state the obvious. In this case the obvious is that the probability of a short-term rally beginning tomorrow is extremely high.

Many of the overbought/oversold indicators that I study closely (ISEE, TRIN, VXN, etc.) suggest that the markets are ready for a bounce tomorrow. In short, tomorrow is setting up to be a mean reversion, oscillator lover's shooting gallery. Keep in mind, however, that if the markets do not make a U-turn into oncoming traffic, it is often more instructive to observe what the markets fail to do than what they actually end up doing.

In the jellyfish tradition, when a bounce arrives, I have no intention of trying to guess how long it will last. The important question is whether large investors will be selling into any rally to unload inventory before the bear market grip tightens – or if this may be the beginning of another periodic pullback in the continuing 5 ½ year bull trend.

As always, caveat emptor!


Bill Luby said...

Disclosure: I picked Obama to win New Hampshire by double digits...

Unknown said...

Looks like your prediction about the market today (not about Obama, lol!) has a very good chance of being accurate, though it wasn't looking good earlier in the trading day.

Volume seems to be higher, though up volume and down volume are pretty much neck and neck right now (towards the end of the trading day).

I'm guessing that your VIX sentiment indicator (VWSI?) was strongly negative yesterday, given that it spiked up over the 10/20/50 day moving averages. otoh, the JAN VIX futures is still a little higher than the cash VIX, so without a strong market rally, the VIX could go higher still, I suppose. I'm hoping not... my positions would benefit if the VIX drops a little.

Bill Luby said...

Hi Felix,

Regarding today's action, I was impressed by how thorough the bears were for all but the last two hours. When the dust settles, it looks like it will be a comfortably up day, but not the 'shooting gallery' of +2.0% or more that I envisioned.

Much to my surprise, the VWSI was only at -4 yesterday (if I had a VXN version of the same indicator, it probably would have been at something like -7)

I am also betting on the VIX not going up from here, but it's not like the index has been able to gain much altitude as of late.



Unknown said...

Interesting that the VWSI is not lower... I'm surprised too. Thank you for the update.

Today's late-day rally could be a good portent for tomorrow, once the weak hands (e.g. margin calls) are washed out. You may still be right about a strong swing up... just a day or two early. This is, after all, the week before options expiration. :)

I agree with you that the VIX will have a hard time advancing over resistance... unless we have a true capitulation-type day, of course. That would be ugly (though probably a good opportunity to make $ selling premium!)

Bill Luby said...

A very interesting day. Frankly, I was surprised that the bulls were able to muster the momentum that they found in the last 1 1/2 hours.

For the record, some of the major indices ended up as follows:
+2.03% NDX
+1.55% OEX
+1.49% NAS Composite
+1.36% SPX
+1.16% DJIA
+1.03% RUT

As for tomorrow, I'll be doing a lot of watching and waiting out of the gate.

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