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This Fear Indicator Put the Bears in Charge for Now

By Jeff Clark
Tuesday, December 15, 2009

If you want to know what's going to happen between now and the end of the year, then keep an eye on the VIX.
 
We've kept close tabs on the Volatility Index in Growth Stock Wire this year (click to read my essays from March, September, and October). It's proved to be a good indicator of short-term market direction. Now, with the stock market confined to a tight, month-long trading range, and with volume drying up as Christmas and New Year's Day approach, it's worth taking another look at this crystal ball.
 
The VIX is best used as a fear barometer. A rising VIX shows increasing fear among investors and is commonly associated with declining stock prices. A falling VIX, on the other hand, indicates investors are less fearful and more willing to take risks. It often leads to rising stock prices.
 
Take a look at this 60-minute chart of the Volatility Index...
 
 
 
This chart measures the action in the VIX during 60-minute intervals over the past two weeks. Now, compare that chart to this one of the S&P 500 over the same time frame...
 
 
It's almost a perfect inverse correlation. While the VIX has been falling and forming a bullish falling-wedge pattern, the S&P 500 has been tracing out a bearish rising wedge.
 
Both charts broke out of their wedges during the final hour of trading yesterday. When a chart breaks out of a wedge pattern, it often leads to a sharp, fast move in the direction of the break. The VIX chart broke to the upside. If it plays out, we could see the VIX rally back up to the December highs near 24.
 
Of course, that action will pressure stock prices, and we could very well see the S&P tumble down to the lower end of its trading range, near 1,090, over the next couple of weeks.
 
Keep in mind, we're looking at 60-minute charts – which are best used to analyze short-term market movements. They say nothing about the longer-term direction of the market.
 
But if you're looking to trade stocks over the next two weeks, the VIX suggests the bears will have the upper hand... er, paw.
 
Best regards and good trading,
 
Jeff Clark




In The Daily Crux
Market Notes
Major defense rally underway... Boeing, Honeywell, General Dynamics, Raytheon, and Northrop Grumman make new highs.
 
Cigarette makers Altria and Reynolds American hit fresh highs.
 
Visa breaks out... credit-card giant spikes 3% to new high yesterday after adding 20% in 10 weeks.
 
Earnings today... Adobe, Best Buy.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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