Vix - put/call ratios - Yen - IEF

In the past, when Vix spiked outside of its 20 day BB, it marked bottoms. This rule broke down last October during the forced liquidation, but even then, it was pretty accurate at marking short term bottoms.

Yen and TLT/IEF helps confirm these bottoms, although these two instruments are not as tightly correlated, often turning before or after the bottom.

The put/call ratios can also help track these bottoms, with the 9 EMA of each rolling over at important turns.

Vix spiked across its 20 day BB last Thursday, and pulled back on Friday. Both Yen and IEF rolled over at the end of last week, which gave a good bottom signal. The put/call ratios started to roll over, but have not followed through today, and we are still in search of our bottom.

But Vix is above its 20 day BB. Bottoms happen at these levels. Unless we enter another period of forced liquidation like last October, the bottom is near.

Retail Sales

A rundown of the retail sales numbers released Today (Jan 14, 2009) with some historical perspective

CNN details the horrific results:

"Holiday sales posted the biggest decline on record falling around 3.5%," wrote Anika Khan, an economist for Wachovia. "Sales have been primarily driven by extensive discounting which is hurting retail profit margins."

Some of the decline in sales can be attributed to falling prices. The figures are not adjusted for price changes, but they are adjusted for seasonal variations. Economists believe consumer prices fell 0.8% in December; U.S. inflation data will be released on Friday.

Retail sales last month were down a record 9.8% compared with December 2007, the Commerce Department's data showed. Sales excluding autos fell a record 6.7% in the past year.

Calculated Risk, in their Retail Sales Collapse in December post provide this chart -- now that's cliff diving.



And Econompicdata provides a sector breakdown chart of December '08 vs. December '07 (not seasoanlly adjusted).


Update: The Financial Ninja adds this figure on retail and food services sales -- after nearly 20 years of steady growth, what a huge drop

Update (Jan 16, 2009): Econompic Data has this chart of CHinese exports

Commercial Real Estate and CMBX index

Calculated Risk commented on the Fed's Beige Book release noting that the "other sections of the beige book are negative too - but CRE is being crushed"

Meanwhile, Markit's CMBX indices are starting to go vertical again. Here's their CMBX-NA-AAA 4 series

McClellan Oscillators giving sell signals

The McClellan Oscillators for the NYSE and for NASDAQ gave sell signals today. Both oscillators crossed over the zero line, and both summation indexes have begun turning over. Interestingly, both summation indexes have turned over as they've approached trend line resistance.

The McClellan Oscillator does a good job in marking short-to-intermediate term tops. On occasion, such as the winter of 2007-2008, these tops last 1-2 weeks, but often the tops are more lasting.

This is a bad sign for equities.

The top panel contains the NYSE McClellan Oscillator, the second panel contains the NYSE McClellan Summation Index and the third panel displays the NYSE. The fourth, fifth and sixth panels are the same but with NASDAQ.

Vix is starting to look toppy

Vix today spiked up to its upper 20 day BB and then reversed. Vix often reverses from these levels, although a change in trend usually requires a spike across the 20 day BB.

Vix is also above its 10 day BB. Reversals happen from these levels as well, but the BB can also act as support.

Both treasuries and the Yen were up today, but not decisively so. The trend in all indicators is up, but Vix is looking toppy.

Today's Vix candle might be hinting at a reversal, but its wick is shorter than its body. The alternate interpretation is to view Vix as an equities overbought/oversold indicator, with the pullback in Vix today relieving some of the overselling.

While the overall trend in these indicators is still up (and the trend in equities is still down), Vix, TLT and the Yen are hinting that a retracement may be in the cards.

WIll EUR/JPY lead equities?

The currency pair EUR/JPY is a great risk-aversion indicator, and often a great tell for where equities will head. Below is Stockcharts chart with SPX in the top panel, EUR/JPY (as $XEU:$XJY) in the second panel, EUR/USD (as $XEU) in the third panel, and the US Dollar index in the bottom panel.

Note how sell offs in EUR/JPY correlate with (and even lead) sell offs in SPX.

Since early October, EUR/JPY has tested the 1.17 level five times, with each successful test leading to a short-term bottom in equities. EUR/JPY is again testing the 1.17 level. For the sixth time. A breakdown would portend further weakness in equities, but a succesfull test might mark another bottom in SPX.

Individual Equity Allocations at Lows

From Toro's Running of the Bulls

From The Big Picture

I saw a similar graph last week at my office which juxtaposed individuals' asset allocations to equities and cash relative to levels of the stock market. Cash holdings are at relative highs while equity holdings are at relative lows.

At such previous levels in the past, the market was near a significant bottom.

That does not mean we are at a significant bottom now necessarily. But I am just saying...

Shiller's cyclically adjusted price-earnings

From

Hallelujah: Stocks Finally Undervalued (Shiller) (Clusterstock)

Stocks have finally dropped below fair value...for the first time in 17 years.

As we've often noted, Shiller's valuation method--cyclically adjusted price-earnings (CAPE)--is one of only two long-term stock valuation measures that have meaningful predictive ability (the other is a measure of replacement value called "Tobin's Q"). CAPE averages 10 years of trailing earnings and thereby mutes the impact of the business cycle, which otherwise distorts price-earnings ratios.

For the past 17 years, according to Professor Shiller, stocks have remained persistently overvalued, sometimes violently so. In the past two months, however, they have finally fallen below their long-term average.

Specifically, the average cyclically-adjusted PE for the past 130 years has been 16X. At the end of December, the S&P 500 was trading at 15X.

So does that mean stocks are going to go straight up from here? Absolutely not. As the last 17 years have shown, the gravitational pull around fair value over the short-term is weak. After past market peaks of this magnitude, prices have usually spent decades below fair value, and we expect we'll likely see the same pattern here.

As the accompanying chart shows, however, over the long haul, the reversion around the mean is powerful. And it suggests that, over the next couple of decades, the S&P 500 will deliver an average long-term return (6%-7% real).

See also: http://clusterstock.alleyinsider.com/2008/11/likely-s-p-500-bottom-600-down-40-from-here

World markets look weak

Here's an update of FXI, EEM and EFA. All three look weak, having broken down out of bear pennants. But there are subtle differences between the three markets, with the breakdown in FXI looking much more severe.

Notice the breakdown in FXI has taken this ETF well past the first level of support, while in EEM, the ETF is at support. Meanwhile, in EFA, the ETF is still above support.

Is China leading this downturn?

Vix, Yen and TLT

Vix today jumped 7% closing well above its 10 day upper BB and above its 20 dma. This trend is disturbing for equities with Vix above its 20 dma has been associated with a down trend in stocks.

The move up in Vix coincided with further strength in Yen as well as in Treasuries. The Japanese Yen has strengthened 5% since early last week, a giant move in the world of currencies. By the looks of it, FXY is going to test its upper BB very soon.

TLT, after hovering around 112 all week, seem sto have broken north. IEF (Barclay's 7-10 year Treasury fund) moved up strongly today as well.

I suppose these results are not surprising, given the weakness in equities. What is more of a concern is that each of these signals have more upside before reaching resistance, suggesting that there will be further weakness in equities.


But it is interesting that VIX/VIX did not rise today, although I am not sure what to make of it. In November VIX/VXV was flat over the middle portion of the month, wihle equities were down.