Monday, October 12, 2009

Are we there yet? - 10.13.09 - Sentiment Analysis

Markets are mixed today ahead of earnings from INTC, IBM, GS, JNJ, JPM, C, GOOG, and GE. Nevertheless, this is an immense week for U.S. equity indexes. Depending on earnings results we could wind up seeing a steep drop off in equity prices as well as a continued dollar slide. In addition, the more the $USD erodes the more it will affect equities. There will come a point where the gains made by European investors will not offset the dollar erosion. I am not saying stocks will sell-off and break technical support in the short-term. I am only suggesting the longer-term effects 3rd quarter earnings can have on financial markets. I actually believe quite the contrary near-term. The buoyant bottom line numbers from the aforementioned Blue Chips should be enough to inject euphoria into traders. The sell-off will come when traders realize the economy is not recovering as fast as it should. Hence, the market will realize that valuations are ridiculous and we will finally see that 10% correction.

For a more logical view of my thesis I suggest examining the above chart of the VIX or Volatility index. “The VIX is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility” (CBOE, VIX). Over the past month the VIX is trading in a range between 22 and 29.5. However, when examining the RSI and MACD there appears to be more room on the upside. Specifically, the RSI is only at 40. It needs to reach about 65 if more significant downside action will come. Also, I see a trend of higher highs forming. If this comes to fruition, we could see 30-33 in a month. Historically, when the VIX trades above 30 we see severe volatility. Translation: The higher the VIX goes the more selling we will see. The selling will start by the first or second week of November; at this time markets will correct.

Price Targets on SPX

Short-term (3-4 weeks): 1075-1080

Long-term (3-4 months): 985-990

By: Patrick Ambrus

1 comment:

  1. I expect at least a 5% correction at the extremes. This would confirm a bullish trend. Unless we get some extreme write downs from the finanical sector i don't see how it earnings could be terrible given JPM's performance today. if fixed income for JPM did well Im sure C is doing just as excellent. Im sure the Merchant Equity Banking arm of GS and MS will help them float as well. Not to mention equity underwriting and prop equity trades on the GS floors. The performance of the S&P500 can give a partial view of how well the financial sector did. Probably another interesting sector would be to look at basic materials...


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