“Xs” Marks the Spot

It looks like tomorrow will be the day that our blog finally migrates to the “Comments” section of our website (www.wminsights.com).  We have also decided to make the daily blog available only to subscribers, along with Insights and the Short Term Review.  Hopefully, this will allow subscribers to avoid fire-wall issues that often interfere with directly accessing a typical blog site.  Non-subscribers will be directed to a new Market Pulse blog page that will be updated once a week on our website.  Those interested in becoming a subscriber should send an e-mail to walter@wminsights.com. We are also on Twitter at http://twitter.com/waltergmurphy.

Errata: in yesterday’s blog we mentioned that, of the 44 trading days so far this year, 47 have been winners based on the S&P.  It should have been 27 winners.  Apologies for the confusion.

On Tuesday, the S&P 500 managed an intra-day low below Monday’s low; this represented the first lower low since February 25.   However, the index managed to finish with a gain of 0.2%.  Breadth was positive by a modest 9:8 margin, but the up/down volume ratio was positive by a more robust 2:1 edge.  Moreover, total volume increased by a hearty 37%.  So it would seem that the day’s internals were more constructive than the S&P’s performance would suggest.  The daily Coppock Curve is positive for 12 of the 24 S&P industry groups.

The index remains in the 1131-1150 resistance area created by January’s top formation.  By extension, it also remains below the important Fibonacci resistance area that is evident from 1150 to 1159.  A breakout would be viewed as a potentially bullish intermediate development and would likely necessitate that we raise tactical support from the current 1029 benchmark.

Nearby support can be found at 1126-1117, then 1112-1104.

S&P 500 with Combined VIX + 10-Year Yields

During the day on Tuesday, we noticed that if we added 10-year yields (using TNX) to the VIX index, the result was an indicator that we feel is a measure of valuation, sentiment, and volatility.  It closed last week at a value of 21.10.  This compares to the October 2007 reading of 21.55 and May 2008’s 20.32. (For comparison, the 11 year low was 14.50 in July 2005.)  By contrast, the 11 year high was 82.82 in October 2008; the March 2009 high was 52.16.

Those are a lot of numbers to digest, but two things are obvious.  First, at its current level, this indicator is at post-2007 overbought extremes.  Second, within its longer 11-year history, the current reading is in the 90th percentile.  While this measure of valuation, sentiment, and volatility will not prevent the current year-long uptrend from going still higher (especially if there is no divergence), it does suggest that the rally is skating on increasingly thin ice.