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Breadth, VIX, and Trends Give Slight Edge To Bulls (VXX, SPY, SLV, TVIX)

April 27th, 2012

Chris Ciovacco: On April 26, we mentioned the chart of the VIX “Fear Index” (NYSEARCA:VXX) relative to the S&P 500 (NYSEARCA:SPY) represented a good way to monitor risk in an environment with some conflicting signals. An updated version of the chart, as of Thursday’s close, is shown below. The bulls made some progress with the blue upward-sloping trendline being violated, which shows decreasing levels of fear relative to the willingness to take on risk (see red arrow). 

Obviously, Friday’s GDP report can flip the chart above one way or another, but another bullish signal was given on Thursday. Near the blue arrow above, notice that RSI (Relative Strength Index) made a lower low and closed below 50. The lower low represents a short-term bearish divergence for the VIX relative to the S&P 500 (bullish for risk). The divergence increases the odds of continued VIX weakness. [Related: VelocityShares Daily 2x VIX Short Term ETN (NYSEARCA:TVIX)]


We originally posted the chart below on April 23. If you look closely, price moved to/slightly above the trendline below 1,400 on Thursday. There is some white space above the chart, which could be filled by price.

Just as the odds of rain increase when skies shift from clear to cloudy, a bullish turn in market breadth increases the odds of a sustainable bullish turn in stocks. Keep in mind, cloudy skies do not guarantee rain. The chart below is an intermediate-term measure of market breadth (the Summation Index). Market breadth refers to the percentage of stocks participating in an advance. Broad participation leans bullish. On Wednesday and Thursday, the Summation Index moved higher – it had been declining for several weeks. The green arrows show where market breadth started to improve. The S&P 500 is shown at the bottom of the chart.

Commodities continue to lag stocks, which is not surprising in a deleveraging environment (a.k.a. debt reduction/less trading on margin). If you are a silver or gold bug, the chart below has yet to show much in the way of hope. The performance of silver (NYSEARCA:SLV) relative to the S&P 500 (NYSEARCA:SPY) has a bearish/downward-sloping 9-month exponential moving average (EMA) and a still ugly looking MACD, which measures momentum (see red arrows).

Written By Chris Ciovacco From Ciovacco Capital Management, LLC

Chris Ciovacco began his investment career with Morgan Stanley in Atlanta in 1994. With a focus on global macro investing, Chris uses both fundamental and technical analysis to assist in managing risk while looking for growth opportunities around the globe in all asset classes. If you are looking for an independent money manager or financial advisor, Ciovacco Capital is worth a look. Chris graduated from Georgia Tech with Highest Honors earning a degree in Industrial and Systems Engineering in 1990. His experience in the professional ranks began in 1985 as he began working as a co-op for IBM in Atlanta.

Ciovacco Capital Management, LLC (CCM) is an independent money management firm serving clients nationwide. By utilizing extensive research, disciplined risk management techniques, and a globally diversified approach, CCM prudently manages investments for individuals and businessowners. Our focus is on principal protection and purchasing  power preservation in an ever-changing global investment climate.


NYSE:SLV, NYSE:SPY, NYSE:TVIX, NYSE:VXX


 

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