back to blog homepage

Watch for Pullback in Near Future for Buying Opportunity

sc

I saw a version of this posted by Tyler Durden today on his blog and thought it was another visual representation of how the market is near a pullback in the 6% range, before it moves to the next leg of this rally.

This chart shows the S&P 500 Index compared to the VIX Volatility Index and Volume. You can see that I have added Bollinger Bands (the blue lines) to both the S&P 500 and the VIX, which represent price action within two standard deviations around the 20-day moving average (yeah, that was pretty geeky, but it provides some very enlightening data points to analyze).

Look at the juxtaposition of the two charts – whenever the black VIX chart hits and moves outside the bands, the red S&P 500 chart reverses in price. It appears to have a near perfect record, and you can see that today we moved outside the lower blue band on the VIX, meaning that we very well could see the S&P 500 reverse to the downside.

The VIX is important because it is a measure of fear and complacency in the market. Right now, investors are extremely complacent which is a contrary indicator to market valuation.

We made the call to raise cash and the market has trickled higher. You can see from the volume bars at the bottom, the blue trendline is angled down over time and that the green positive volume bars are in general below the line and the lines that move above trend are mostly on down days.

This is a market that technically should move lower – however, the fundamentals are strong at the moment. Earnings should continue to grow stronger in the interim – but significant headwinds are out there and we will continue to monitor them.

Our near-term plan is to continue to let our stop losses run, collect cash if any hit, and invest it in short-term bond funds until the market pulls back and we can reinvest in equities. Given the hard won gains post-crash, protecting them with our current strategy is important to me. I’ll keep you up-to-date as things progress, but given what the technicals are saying, being conservative is prudent.


Jefferson Airplane – White Rabbit (click to play video at YouTube)

Its been a couple of posts since I included any Vietnam War era videos, so I thought I’d include one that I had some requests for.

Your trivia tonight is related to the Jefferson Airplane. In Vietnam War era, there were three very famous rock festivals, and they were the only band to play all three. Can you name them?

Enjoy this video from the Smothers Brothers TV show and I’ll be back soon.

Mark