Cobra's got a post from Jan 6 with overbought signals from the NYSE Percent of Stocks Above 50 Day Moving Average, SPX Short-Term Volume Osc and Long-Term Volume Osc and the 4 Week New High/Low Ratio.
The Financial Ninja also has percent-of-stocks-above-50-day-moving average: overbought and
volatility-stretching-into-oversold and McClellan Oscillator, Super Overbought and Bullish Percent Index, Flashing Warning Signs.
Wednesday, January 7, 2009
Vix, Yen and TLT -- becoming bearish
Vix, Yen and TLT are three of my favourite indicators for stocks, with all three having negative correlations with equities.
Vix, in particular, has some powerful predictive properties for equities. I find that the 10 day and 20 day Bollinger Bands (BB) help frame these properties.
Consider the 20 day BB and how vix oscillates between the bands. When Vix is in the lower half of the band, the trend in equities is up, and vice versa for the upper band. When Vix spikes outside the 20 day BB, that usually means an intermediate term top or bottom in the markets (last October the tops were very short term). These events are consistently followed by tests of the center of the BB, and usually lead to tests of the opposive BB.
However, many times Vix's behaviour is constrained by the 10 day BB, instead of the 20 day. So it helps to watch both.
Below is a chart of Vix, with both 10 day and 20 day BB. I also have the ratio of VIX/VXV in the same chart (VXV is the 3 month Vix). The second panel has $XJY (Japanese Yen) and GLD, while the third panel has TLT (20+ year Treasuries) and $SPX.
Vix jumped today, with both XJY and TLT finding support from their sell off last week and both starting to move up. These all correlated with the sell-off in equities. But if these trends continue, expect further weakness in stocks.
As noted on the chart, Vix did find resistance at its upper 10 day BB. Above this is the center of the 20 day BB. But if Vix makes it above these two, it probably means an extended downtrend in equities is in order.
And finally, we have the ratio of Vix/VXV. This ratio was trading at a discount since Christmas, it has since gone flat. This is normally bearish for equities as it implies investors are becoming more bullish on Vix.
However, the longer-dated Vix futures are still trading at a premium to the index, so perhaps the Vix/VIX ratio is not as bearish of an indicator.
Vix, in particular, has some powerful predictive properties for equities. I find that the 10 day and 20 day Bollinger Bands (BB) help frame these properties.
Consider the 20 day BB and how vix oscillates between the bands. When Vix is in the lower half of the band, the trend in equities is up, and vice versa for the upper band. When Vix spikes outside the 20 day BB, that usually means an intermediate term top or bottom in the markets (last October the tops were very short term). These events are consistently followed by tests of the center of the BB, and usually lead to tests of the opposive BB.
However, many times Vix's behaviour is constrained by the 10 day BB, instead of the 20 day. So it helps to watch both.
Below is a chart of Vix, with both 10 day and 20 day BB. I also have the ratio of VIX/VXV in the same chart (VXV is the 3 month Vix). The second panel has $XJY (Japanese Yen) and GLD, while the third panel has TLT (20+ year Treasuries) and $SPX.
Vix jumped today, with both XJY and TLT finding support from their sell off last week and both starting to move up. These all correlated with the sell-off in equities. But if these trends continue, expect further weakness in stocks.
As noted on the chart, Vix did find resistance at its upper 10 day BB. Above this is the center of the 20 day BB. But if Vix makes it above these two, it probably means an extended downtrend in equities is in order.
And finally, we have the ratio of Vix/VXV. This ratio was trading at a discount since Christmas, it has since gone flat. This is normally bearish for equities as it implies investors are becoming more bullish on Vix.
However, the longer-dated Vix futures are still trading at a premium to the index, so perhaps the Vix/VIX ratio is not as bearish of an indicator.
Is the put/call ratio calling a top?
The put/call has shown a pretty good track record of calling intermediate tops and bottoms. The ratio was giving overbought signals this month, but has just reversed. Indeed, the ratio may be signalling that the top is in.
Below is a chart of CBOE options total put/call ratio ($CPC in Stockcharts). The 60 EMA is superimposed in the top panel. The 9 EMA appear in the second panel superimposed over the S&P 100 index ($OEX) as an area. The third panel has the 21 EMA of $CPC, with $OEX as OHLC bars. Both the 9 EMA and the 21 EMA do a good job in picking out the tops and bottoms in $OEX, with the 9 EMA having a few more false positives.
Notice that the EMA's reached multiyear lows this past week, very overbought, before reversing. If this reversal is bona fide, then chances are, the top is in. Given how overbought this index is, the reversal likely is for real. Note, the equity only put/call ratio is not as overbought (see second chart).
I've also highlighted the structure of the $CPC index during the top in October 2007. The index has almost an identical structure this week, complete with the thrust up.
The put call ratio might be signalling that the top is in.
Here's the same chart using the equity-only put call ratio (30 months, instead of 18). Similar story, complete with "air pockets in the index, but notice that the EMA's are still above last May's lows.
Below is a chart of CBOE options total put/call ratio ($CPC in Stockcharts). The 60 EMA is superimposed in the top panel. The 9 EMA appear in the second panel superimposed over the S&P 100 index ($OEX) as an area. The third panel has the 21 EMA of $CPC, with $OEX as OHLC bars. Both the 9 EMA and the 21 EMA do a good job in picking out the tops and bottoms in $OEX, with the 9 EMA having a few more false positives.
Notice that the EMA's reached multiyear lows this past week, very overbought, before reversing. If this reversal is bona fide, then chances are, the top is in. Given how overbought this index is, the reversal likely is for real. Note, the equity only put/call ratio is not as overbought (see second chart).
I've also highlighted the structure of the $CPC index during the top in October 2007. The index has almost an identical structure this week, complete with the thrust up.
The put call ratio might be signalling that the top is in.
Here's the same chart using the equity-only put call ratio (30 months, instead of 18). Similar story, complete with "air pockets in the index, but notice that the EMA's are still above last May's lows.
Sunday, January 4, 2009
Thoughts on ISEE part I
The International Securities Exchange ISEE index reached a multi-year high just before New Years, reaching 206 on December 29. Here's a screen capture of the index since the start of 2006 (from the ISE website). The ISEE index has not been above 200 since early 2006.
And here's a look at the index since the end of July (same source)
I was curious about what this abrupt rise in ISEE might portend for the stock market, I downloaded all available ISEE data from ISE website (April 1, 2002 to Dec 31, 2008) and SPX data from Yahoo Finance on January 1st 2009. I then analyzed the data in either Excel or S-Plus.
My first concern is whether this rise in the ISEE index might be related to either Christmas or end-of-year effects. If Christmas or end-of-year plays a role in ISEE, then one would expect to see a similar effect each year. I compared each year's ISEE index over the course of the year. Here's a plot of the ISEE index broken down by year, with each year's data aligned to the end-of-year. Note the ISEE index began on April 1, 2002.
The daily mean, calculated by averaging the ISEE index from all years, is plotted as a thick blue line. It appears that the ISEE tends to rise towards the end of the year, peaking 10 trading days before the end of the year, which would be about a week before Christmas. However, between Christmas and New Years, there is not consistent trend. This year's ISEE rise above 200 can not be explained by end-of-year tendencies.
So what does this sudden rise in ISEE mean?
Here's a look at the entire history of the index (beige line), compared to the SPX (S&P 500, black line). In this chart, I've multiplied the ISEE values by 10 so that the index can be superimposed with SPX. I've added the 10 day moving average (10 DMA, purple line) and the 50 day moving average (50 DMA, navy line), as well as the average ISEE value over this time period (141, but on this chart, 1410, teal line)
While the ISEE index did reach a multi-year high before New Years, the 206 print is by no means exceptionally high for the index. Over the 2003-2006 period, ISEE was reguarly above 200 (2000 on the above chart).
Consider ISEE's 50 DMA in the above chart. From mid 2003 to early 2006, SPX rose and ISEE was above its mean value. From early 2006 to mid 2007, the stock market continued to rise, but ISEE was below its mean value. It would appear that the absolute value of ISEE is not related to SPX performance, or at least not obviously related.
However, on a shorter time scale, intermediate tops and bottoms in the stock market do appear to correlate with tops and bottoms in ISEE, or at least in ISEE's 10 DMA. In other words, ISEE's relative value appears to be related to stock market performance.
To try to illustrate this, I've plotted SPX since April 1, 2002 against the 10 day EMA of ISEE, with this value multiplied by 10 so that both indices are on the same chart. By using the EMA instead of the SMA, the moving average has less of a lag.
Here's the same chart looking at the 2007-2008 period only.
Tops and bottoms in SPX seem to correlate well with tops and bottoms in ISEE. I'll take a look at ways to trade based on ISEE in a later post.
And here's a look at the index since the end of July (same source)
I was curious about what this abrupt rise in ISEE might portend for the stock market, I downloaded all available ISEE data from ISE website (April 1, 2002 to Dec 31, 2008) and SPX data from Yahoo Finance on January 1st 2009. I then analyzed the data in either Excel or S-Plus.
My first concern is whether this rise in the ISEE index might be related to either Christmas or end-of-year effects. If Christmas or end-of-year plays a role in ISEE, then one would expect to see a similar effect each year. I compared each year's ISEE index over the course of the year. Here's a plot of the ISEE index broken down by year, with each year's data aligned to the end-of-year. Note the ISEE index began on April 1, 2002.
The daily mean, calculated by averaging the ISEE index from all years, is plotted as a thick blue line. It appears that the ISEE tends to rise towards the end of the year, peaking 10 trading days before the end of the year, which would be about a week before Christmas. However, between Christmas and New Years, there is not consistent trend. This year's ISEE rise above 200 can not be explained by end-of-year tendencies.So what does this sudden rise in ISEE mean?
Here's a look at the entire history of the index (beige line), compared to the SPX (S&P 500, black line). In this chart, I've multiplied the ISEE values by 10 so that the index can be superimposed with SPX. I've added the 10 day moving average (10 DMA, purple line) and the 50 day moving average (50 DMA, navy line), as well as the average ISEE value over this time period (141, but on this chart, 1410, teal line)
While the ISEE index did reach a multi-year high before New Years, the 206 print is by no means exceptionally high for the index. Over the 2003-2006 period, ISEE was reguarly above 200 (2000 on the above chart).
Consider ISEE's 50 DMA in the above chart. From mid 2003 to early 2006, SPX rose and ISEE was above its mean value. From early 2006 to mid 2007, the stock market continued to rise, but ISEE was below its mean value. It would appear that the absolute value of ISEE is not related to SPX performance, or at least not obviously related.
However, on a shorter time scale, intermediate tops and bottoms in the stock market do appear to correlate with tops and bottoms in ISEE, or at least in ISEE's 10 DMA. In other words, ISEE's relative value appears to be related to stock market performance.
To try to illustrate this, I've plotted SPX since April 1, 2002 against the 10 day EMA of ISEE, with this value multiplied by 10 so that both indices are on the same chart. By using the EMA instead of the SMA, the moving average has less of a lag.
Here's the same chart looking at the 2007-2008 period only.
Tops and bottoms in SPX seem to correlate well with tops and bottoms in ISEE. I'll take a look at ways to trade based on ISEE in a later post.
ISM and SPX
Vix and More has an excellent presentation in his chart of the week: ISM Plummets. The chart, modified below, captures the ISM and SPX from 1950. Vix and More highlighted how the chart was plumbing depths only seen three times before during the serious recessions of 1949, 1974-75 and 1980. Moreover, the most recent ISM report's new orders reading was lower than ay time in its 60 year history, suggesting further weakness ahead.
Wonderful chart, but one thing that struck me is how poorly correlated the ISM index is to stock market bottoms. Often, both SPX and ISM dip in the same year, but in general SPX bottoms before the ISM index reaches its lowest reading. In other words, ISM normally appears to lag SPX. I've highlighted numerous such examples in green.
Also, on multiple occasions, the ISM index dropped without a "large" drop in SPX. In these occasions ISM fails to predict SPX. Several of these examples are highlighted in blue.
There are occasions where the drop in ISM leads the drop in SPX. I've identified three, highlighted in red, which occurred in 1960, 1982 and 2002.
In general, drops in the ISM index do not appear to predict further stock market weakness. In most cases, SPX has already bottomed and is rallying by the time ISM makes a bottom. It would seem that equities had already anticipated the bottom in the ISM and had subsequently advanced. I would be cautious in using the ISM index to predict further stock market weakness.
Mind you, there are three examples where the ISM lead SPX down: 1960, 1982 and 2002. Maybe 2009 will play out like these years. Perhaps there is some common macro-economic link between these three events and today? The 1960 recession began with a housing bubble burst, 1982 was the Volker recession caused by high interest rates, and 2002 was part of the tech-bubble crash. If there's a link, it's not obvious to me.
One last observation. All three of these recessions, if you look closely, had stock market rallies between the first and final lows of the ISM index. In these cases, perhaps, equities failed to anticipate the continued weakness in the economy and subsequently fell again. Perhaps there is a common link with today's situation?
Wonderful chart, but one thing that struck me is how poorly correlated the ISM index is to stock market bottoms. Often, both SPX and ISM dip in the same year, but in general SPX bottoms before the ISM index reaches its lowest reading. In other words, ISM normally appears to lag SPX. I've highlighted numerous such examples in green.
Also, on multiple occasions, the ISM index dropped without a "large" drop in SPX. In these occasions ISM fails to predict SPX. Several of these examples are highlighted in blue.
There are occasions where the drop in ISM leads the drop in SPX. I've identified three, highlighted in red, which occurred in 1960, 1982 and 2002.
In general, drops in the ISM index do not appear to predict further stock market weakness. In most cases, SPX has already bottomed and is rallying by the time ISM makes a bottom. It would seem that equities had already anticipated the bottom in the ISM and had subsequently advanced. I would be cautious in using the ISM index to predict further stock market weakness.
Mind you, there are three examples where the ISM lead SPX down: 1960, 1982 and 2002. Maybe 2009 will play out like these years. Perhaps there is some common macro-economic link between these three events and today? The 1960 recession began with a housing bubble burst, 1982 was the Volker recession caused by high interest rates, and 2002 was part of the tech-bubble crash. If there's a link, it's not obvious to me.
One last observation. All three of these recessions, if you look closely, had stock market rallies between the first and final lows of the ISM index. In these cases, perhaps, equities failed to anticipate the continued weakness in the economy and subsequently fell again. Perhaps there is a common link with today's situation?
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