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Oh-So-Close
To An Upside Trade |
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Friday's
6% gain salvaged what would have otherwise been one of the worst weeks
on record for the market, but let's not forget that stocks still
fell an average of more than 8% over the prior five trading days.
We're not intending to be a 'downer'. In fact, we're a little bullish (more
on that in a moment). We just don't think it does anybody any good
to ignore the lingering risks or realities, even if we're thinking about
a near-term rally.
So how does
Friday's rally differ than any of the other one-day rallies we've
seen since September? Well, the rally itself is no different than
the rest - and all the rest resulted in lower lows being hit a few days
later. However, there is something different with this surge that
we haven't seen correspond with most of the prior surges.
 This
time, the VIX hit a ceiling on Thursday (with the market's selloff),
and then moved much lower on Friday (with the market's big gain). That's
normal for the VIX - it moves in the opposite direction as the market,
and we've seen it continue to do so for the last several weeks. The specific
difference this time is where the reversal occurred ... at the upper
Bollinger band. Bollinger bands (green) often act as limits or boundaries,
so to see the VIX do an about-face with this encounter is a glimmer of
hope for the bulls.
That's not the
only thing we observed about the VIX though. The VIX's recent peak of 81.48
pretty much matched its prior highs from October. The peak of 89.54 on
October 24th is the sole exception, but it's worth noting the VIX neither
opened nor closed above 81.48 on the 24th. So, the 81/82 level is a
key ceiling ... or has been so far.
So we're
bullish? Not quite yet. Let's see what happens in the coming week before
we get too excited. The market is certainly oversold enough to foster a
strong bounce, and when the S&P 500 fell under 2002's lows on Thursday,
that could have cleared the decks for the buyers. However, one day does
not make a trend; we may end up mimicking the chart we saw in October,
when the market kept driving lower while the VIX kept pushing its upper
Bollinger band higher.
We'd just
like to see some follow-through ... enough to break us out of the slump,
and let us make a decent move higher. If we can get a couple more bullish
days with some volume behind them, the S&P 500 has a shot at getting
up to 955, or 1088. Those levels are both key Fibonacci retracement levels.
You may as well throw 1007 in there as a possible target as well; that's
been the ceiling for the index since early October.
Like we said
though, it may all be irrelevant if investors come back to the market in
a fearful mood on Monday. That's the biggest challenge we're all facing
right now - values mean little right now, and emotions are on full-throttle.
In some senses, you have to outguess the next panic or the next euphoria.
Stay tuned.
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Last
Week's Surprisingly Strong Industry |
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You might think
oil and gas stocks posted some big gains last week, as they often do when
the rest of the market is weak. Or, maybe even some beaten-up financial
industry found some sympathy buyers to end the week on a positive note.
However, neither of those sectors was even close to being the leader
last week.
With the exception
of gold stocks - which are usually inversely correlated with the market
anyway - water and water utility stocks made nice gains last week
despite
the market's terrible performance.
 So
was it a fluke, or a hint? If it were just one good week
we might simply call it a coincidence and forget about it. However, the
same industry is also the leader for the last 6 month, 3 month, 2 month,
and 4 week time frames. In other words, water utility stocks have been
consistent
winners ... the cornerstone of a trend's potential longevity.
The nearby chart
of the Dow Jones Water Index says it all. The last four months have been
a wild ride to be sure, but most of the volatility has been bullish. More
importantly though, there's still room to keep recovering before the index
starts to deal with its 2007 peak. In fact, these stocks could gain an
average of 29% before hitting 2007's highs.
Be sure to check
out the blog
if you're looking for more information about the stocks in this group.
We'll warn you
right now that many of them don't look nearly as attractive as this chart
does, and for a few, the fundamentals are surprisingly bad. On the
other hand, the best of the best have very attractive charts, and some
outstanding - almost to the point of bizarre - net profit margins.
That's why the P/Es may feel a little high for some ... the earnings
are just that strong.
Check the blog
early and often next week. If this potential recovery actually materializes,
the hottest (and coldest) industries will present themselves early on.
We'll point them out for you. And, if any rally fizzles before it gets
started, we'll at least be able to find a few more hot spots like water
has been.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
