The Stock Market: Poised for a Pause--or a (Brief) Reintroduction to Panic   (April 13, 2009)

The VIX--often called "the fear index"--is revealing a remarkable return of confidence which borders on euphoria. This usually signals a short-term market top.

The VIX should give market bulls (such as myself) pause. Take a quick look at the chart:

Even a cursory glance yields the following observations:

1. The peak of panic and doubt was reached in October; since that double spike (the 2nd being in Nov.) the VIX has worked its way down even as the market hit a new low in March. That was further evidence that the market was due for a bullish turn.

But this rather rapid return of confidence and appetite for risk should make us somewhat cautious, as in: has the 5-week rally which ranks as one the market's best ever run past mere confidence into euphoria?

The image that comes to mind is Wiley E. Coyote speeding off the cliff, then pausing to look down as he realizes he has left terra firma and is about to feel the painful pull of gravity.

2. The price recently punched through the lower Bollinger Band, suggesting an extreme has been reached. Yes, prices can ride the Bollinger up or down, but when we see that the price last touched the upper bands at the March lows, we can't help but wonder if this marks a near-term top. (Recall that the VIX rises and falls in opposition to the market's extremes; a high VIX usually marks a market low and vice versa.)

3. The stochastic indicator is plumbing the depths which usually mark a turning point in sentiment.

4. The VIX has fallen under its 200-day moving average. Some will see this as a positive, but markets rarely move in one direction for long; a countermove is to be expected from time to time.

5. Even as the VIX slid from almost 90 to 35, the MACD indicator has been rising from the first of the year, providing a divergence from the downtrend in price.

6. DMI indicators are approaching the upper and lower edges of their recent range.

7. If we stand back a step, a huge triangle or pennant formation is visible in the VIX. That is, the price fluctuations have diminished into a narrowing triangle, a situation which is usually resolved by breaking up or down in a big way.

Bulls may argue that the recent plunge has broken the triangle to the downside, a sign of bullishness, but all the other indicators suggest caution in the super-bullish interpretation.

Is the economy really supporting a collapse of the VIX from 35 back to the complacency of the low 20s? As investor confidence readings shoot back up to "happy days are here again" levels, skittish Bulls such as myself are seeing abundant reasons to cash in our chips or maybe slip over to the thinned-out short-side tables in the riverboat and place a few small wagers to hedge our long bets.

Something else gives reason to pause: the markets are hitting key support/resistance levels. Mr. Market rarely blows through key levels without some playful volatility, and as the DJIA is just 60 points from key resistance at 8146, the SPX approaches 875 and the Naz gaps up to 1652, observers may well ponder what happens when resistance is combined with open gaps and a euphoric rise in confidence. The market could certainly rise for a day or two or three, but it certainly looks like Wiley E. Coyote is fast approaching the cliff edge.

Please read the HUGE GIANT BIG FAT DISCLAIMER below once again and note this is not investment advice; it is merely the completely free ramblings of an amateur observer.

Thank you to everyone who emailed me in the past two weeks. I will try to respond to everyone over the next week. Your patience and understanding are greatly appreciated.

If you'd like to watch me blink a lot and try desperately not to make a fool of myself answering very tough questions, you might enjoy:

Dangerous Minds w/ Richard Metzger Episode 1 Part 1 (interviewing Charles Hugh Smith)

Dangerous Minds w/ Richard Metzger Episode 1 Part 2

Dangerous Minds w/ Richard Metzger Episode 1 Part 3

Dangerous Minds w/ Richard Metzger Episode 1 Part 4

Thank you, Richard, for giving me a rare opportunity to pontificate on Marx.

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