I discussed the QE Buying Power Index a few times in the last week and demonstrated how it could be used as a filter for a mean reversion system. While a good number of people have signed up for the webinar there are likely also a large number of you who after seeing the mean-reversion results thought, “Who cares? I don’t trade mean reversion techniques.”
The tools compromising my approach to the markets are saying a S&P top is at hand:
Volatility ETNs can serve as tools to protect assets that you already have in your portfolio. For example, 80% of the time over the last year, the iPath S&P 500 VIX Mid-Term ETN (VXZ) moved in the opposite direction of the S&P 500 itself. It follows that an active investor could purchase exchange-traded note protection if he/she is concerned about the magnitude of this seasonal stock rally.
THE MARKET
This was the kind of day where there was a lot of Jell-O moving on the plate. This was another day where the Dow didn’t move, but it was a bullish day. The Dow was only up 5. The S&P, up 2 and change. Nasdaq was up 11 and the Nasdq-100 up 13…as Apple continue to do what it does.
We will be watching our position in Germany (EWG) closely over the next few days. The chart below shows the German DAX’s performance relative to the S&P 500. Note when RSI (top) reaches levels similar to what we have seen recently (blue arrows), the DAX’s relative performance tends to weaken (center of chart). The black ADX line (bottom) shows the strength of the current trend. The ADX line is trying to roll over now, which is indicative of a weakening trend. The orange arrows highlight the current and historical ADX black rollovers that occurred near peak RSI levels.
On the DeMark chart of Germany (EWG) relative to the S&P 500 (SPY), we are nearing an exhaustion count. In recent history, similar DeMark signals were followed by a pullback in risk assets (red arrows). These signals can be a little early (late 2011 below), which means stocks and commodities may have some more upside.
The bottom line is — the market remains in shape. There are few areas, not so good. Plenty of stocks that are not in good shape. But the things that are working, are working fine.
Gold’s rally looks like it may be ready to take a breather, which may coincide with a period of “risk off” beginning relatively soon. Note price action after the orange arrows.
