Busy Month for TrendCatcher, VXO Enters Technically Overbought Territory

June is shaping up to be a busy month for our intraday TrendCatcher strategy.
It's triggered a signal in six out of the seven trading days this month,
already matching the number of trades during the entire month of May (which
was unusually slow). Institutional participation has been heavy and almost
exclusively on the sell side, reflected in the persistently weak NYSE TICK
readings. TICKscore settled at -12 Tuesday, with the cumulative TICKscore
moving further below its March lows. Similarly, our cumulative TICK indicator
closed at a low -53,000, keeping the 20-day moving average of the cumulative
TICK in a solid downtrend. The 20-day average is a good indication of the
intermediate-term market trend, which in this case remains decidedly negative.

New 52-week lows continued to climb Tuesday despite the inside day for the
S&P, reaching 168 on the big board. That's the highest number of new lows
since March.

The S&P100 Volatility Index (VXO) closed more than 10% above its 10-day moving
average for a third consecutive session Tuesday. That triggers a short-term
buy setup (for the S&P) that remains in effect until the VXO closes less than
10% above its 10-day average. While this signal can be early, it generally
does a good job at identifying potential short-term bottoming periods. The
last thirty times this signal has been triggered are noted in the table below,
beginning with the date when the VXO closed 10% above its 10-day average for a
third consecutive session, and ending with the date when the VXO closed below
that threshold and the S&P's performance in this time frame. Note that the S&P
was down more than 1% in only three cases out of thirty, while it gained 1% or
more sixteen times...

VXO >10% Above 10day Avg Three Days
06/10/08 - ??/??/??... S&P500 ???
03/10/08 - 03/11/08... S&P500 +3.7%
01/22/08 - 01/24/08... S&P500 +3.2%
01/04/08 - 01/09/08... S&P500 -0.2%
11/09/07 - 11/13/07... S&P500 +1.9%
11/05/07 - 11/06/07... S&P500 +1.2%
08/16/07 - 08/17/07... S&P500 +2.5%
07/26/07 - 08/02/07... S&P500 -0.7%
06/26/07 - 06/27/07... S&P500 +0.9%
03/01/07 - 03/06/07... S&P500 -0.6%
07/17/06 - 07/19/06... S&P500 +2.1%
06/09/06 - 06/15/06... S&P500 +0.3%
05/19/06 - 05/25/06... S&P500 +0.5%
10/07/05 - 10/14/05... S&P500 -0.8%
04/18/05 - 04/19/05... S&P500 +0.6%
10/13/04 - 10/15/04... S&P500 -0.5%
08/09/04 - 08/10/04... S&P500 +1.3%
03/12/04 - 03/17/04... S&P500 +0.3%
09/26/03 - 09/29/03... S&P500 +1.0%
01/28/03 - 01/29/03... S&P500 +0.7%
09/05/02 - 09/06/02... S&P500 +1.7%
07/23/02 - 07/24/02... S&P500 +5.7%
07/12/02 - 07/17/02... S&P500 -1.7% (*)
02/06/02 - 02/08/02... S&P500 +1.2%
09/04/01 - 09/24/01... S&P500 -11.4% (*)
02/22/01 - 02/26/01... S&P500 +1.2%
10/12/00 - 10/16/00... S&P500 +3.4%
04/14/00 - 04/17/00... S&P500 +3.3%
07/26/99 - 07/27/99... S&P500 +1.1%
01/14/99 - 01/15/99... S&P500 +2.6%
10/02/98 - 10/09/98... S&P500 -1.8% (*)

Keeping in mind the short-term negative setup related to the SPX/BKX
performance on Monday (see yesterday's column), the near-term outlook is a bit
of a toss-up. If the VXO setup above proves to be early, we're most likely
looking at lower prices immediately ahead followed by a short-term bounce.
Otherwise we'll most likely see a modest bounce, probably just enough to push
the VXO out of technically overbought territory. Keep in mind the VXO only
needs to close below 23.65 on Wednesday to close out this short-term bullish
setup. One day of flat volatility and this buy setup will be off the board,
leaving the market vulnerable to another leg down.

Categories : Archived EOD Commentary, End-of-Day Commentary

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