T2108 Update – January 6, 2012 (Borderline Overbought)

(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 70% (overbought day #4)
VIX Status: 20.6
General (Short-term) Trading Call: Close more bullish positions, begin/expand bearish positions

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)

Commentary
T2108 closed the day STILL clinging to overbought territory (I rounded up from 69.88%). Since T2108 closed overbought to start the year, the S&P 500 has gone absolutely nowhere. The market’s confusion is perhaps reflected in two key sentiment indicators. Only 17% of investors in the AAII sentiment survey are bearish (49% are bullish). However, according to Lipper FMI, investors took money of equity mutual funds for a ninth straight week (bonds were again the big beneficiaries). Even the CBOE put/call equity ratio is of no help: over the last month the 21DMA has gone nowhere. The U.S. stock market is even ignoring the continuing plunge in the euro (see “Potential Trades on Euro Fatigue” for more details, including my change in trading strategy based on this apparent decoupling).

In the meantime, the VIX continues to sag. The volatility index is now back at its lowest level since the August swoon began. VXX has broken down to fresh 5-month lows, compelling me to buy VXX puts in anticipation of further declines. If the VIX also breaks down, it could signal the needed tie-breaker; advantage would go to the buyers. The T2108 portfolio remains positioned bearishly with powder left to expand the position further if the overbought period extends past the average duration of 9 days (median is 4 days).

Here are an interesting mix of behaviors in notable individual stocks for the first week of trading:

• Children’s Place (PLCE): Dropped 13% after a poor sales report on Thursday morning. Buyers took stock back up 6%. PLCE dropped slightly on Friday to rest just above its 200DMA.
• Google (GOOG): GOOG soared 3% on the first trading of the year. By Friday, the stock closed having given up most of its gains.
• JC Penney (JCP): Dropped 7% after a poor sales report on Thursday morning. By Friday’s close, JCP recovered all its losses. 200DMA holds as support.

Weekly T2108

*All charts created using freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SDS, long VXX calls and puts