Tuesday, November 1, 2011


We are leveraged long ....TTT BUY SIGNAL ON 1210 SPX CASH

Bottom Line


When we get a waterfall decline like the past two days, accompanied by spikes in volatility, the market almost always bounces back in the short-term, and it should happen again. Asset flows in the Rydex mutual fund family is abnormal and troubling, however, and doesn't fit with what our other indicators are showing.



The decline over the past two days has been somewhat scary, at least judging from a couple of our indicators.

Earlier this afternoon in a Data Brief, we looked at "double jumps" in the VIX fear gauge. The VIX did close with a gain of more than +15% for the 2nd consecutive day on Tuesday, so the table of 6 precedents is in effect. Even when we relax the parameters, the short-term repercussions were bullish.

Somewhat related to the VIX, put option activity has spiked relative to call options. The Equity Put/Call Ratio moved to its 5th-highest distinct level since the market bottomed in 2009. The other days saw stocks move higher in a volatile fashion afterward.

One piece of the puzzle that doesn't fit is Rydex mutual fund traders. The Beta Chase Index jumped above 6 on Monday, very unusual for a down day in the market.

Part of the reason was that those traders continued to move into the Nasdaq 100 (NDX) fund, pushing the Bull/Bear Ratio there to the highest ever (dating back to 2000). There is now 50 times more money invested in the long NDX fund than the inverse NDX fund. That is not encouraging.

Technicals, Seasonality, Etc.


There have been 6 times the S&P lost -2% or more the day before a Federal Reserve interest rate decision. All 6 of them rallied on the day of the decision, averaging +1.7%.

There have been a handful of times since 1950 that the S&P suffered at least a -5% decline over 3 days after hitting a multi-month high. All 5 occurrences led to a 2-3 day halt of the selling pressure at worst.

Since 1982, there have been 7 times the S&P opened down at least -1% and closed down at least -2% for two straight days, and 5 of those were in 2008. For what it's worth, 6 of the 7 rebounded the next day. There was a lot of short-term volatility, but by 10 days later, 6 of the 7 were positive again.

Since 1928, there have only been 4 other times the S&P lost -2% or more on the last day of a month, and -2% or more on the first day of the next month (Jun '31, Oct '98, Mar '09 and Oct '11). All of them rallied at least +11% into the end of that month.

If we just look at consecutive -1% declines surrounding month-end, then the rest of the month was positive 11 out of 14 times, averaging +4.8%.


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