TDEN

The key indicator to watch is the vix. The vix is now near the top of its downtrend channel that has been in place since March, 2009. The vix is getting squeezed between its rising 21 day moving average and its descending 200 day moving average. We will not know the ultimate resolution to this scenario until the vix either breaks out of the channel to the upside or resumes its trend to the downside of the channel. A breakout to the upside would indicate a trend reversal that could be significant.

Based upon today’s price action, it appears that S&P 1100 is the line in the sand where the bears are going to make their stand. If we can get above that level we should see a massive short covering rally possibly sending the market to new highs.

From a fundamental point of view irrational fear has overtaken the markets but markets rarely act rationally nor do they always go up. Everyday the market commentators have some specific reason why the market either goes up or down but for the most part those reasons are bogus. In the long term markets tend to move in cycles regardless of what the commentators have to say.

The retail investor is the first to panic but most retail investors have sit out the rally due to fear of further losses so I do not believe there have been enough participants for the bear market to resume at this time. Many companies with cash have been buying back their stock since the March, 2009 lows thereby limiting the supply of stock in the market so this puts a further constraint on the potential market downside. Many companies have been reporting excellent earnings and increasing dividends so this also provides further support for the market.

According to various sources, insiders have been selling a lot of their company stock but I have found this to be a poor indicator of anything. Many times insiders sell loads of stock only to see the stock price rise in value and the opposite is also true. In any case both the CEO’s of Cisco and Novellus say business is booming in the IT sector. With Apple and Amazon reporting blow out earnings the consumer is obviously far from dead. Interestingly enough the retail sector whose untimely death has often been predicted was the only one that gained in the markets today.

The carry trade of selling U.S. dollars and buying everything else is also winding down due to the strengthening dollar. The correllation between the rising U.S. dollar and the dropping stock market however is not clear cut. The dollar has been in an uptrend since Dec, 2, 2009 but the stock market continued to rally until Jan. 20, 2010. There also seems to be a disconnect between the dollar action and commodities as on some days they all head in the same direction and on other days they diverge. It appears that each market is moving to the rhythm of its own beat. In any event first the yen was used for the carry trade and then the dollar. I would not be surprised to find another vulnerable currency such as the Euro being used to fund the carry trade in the near future.

The average correction since the March, 2009 bottom lasted about 2 weeks with the one from June-July 2009 lasting about 4 weeks. So far we are 12 days into this correction. During each correction there was the same doom and gloom scenario as market sell-offs are never pleasant. A perma-bear whose newsletter I receive announced today the official end of the bull market. Interestingly enough, just a few weeks before the correction began he told his subscribers to sell their shares in DOG for a loss as he believed the bull market was in full force. DOG is an inverse etf that goes up when the Dow Jones Industrial Average goes down. Talk about bad timing.

It is way too early to tell if the bull market is over as all the major averages are well above their 200 day moving averages and there have been no bearish moving average crossovers. At this point in time the major trend is still up and regardless of the day to day market fluctuations this trend appears to still be strong.