(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: 82% (sixth day of overbought period)
VIX Status: 30
General (Short-term) Trading Call: Most bullish short-term trades should be closed by now. A SMALL bearish position should already be active. Otherwise, continue transitioning to this positioning.
Commentary
Amazingly, T2108 only dropped from 86 to 82% today even as the S&P 500 was crushed for a 2.5% loss. I would never have predicted such a thing, and I daresay this divergence is very bullish for a quick snapback. The S&P 500 is now below its 200DMA, but the near-term uptrend remains intact. I am still expecting a retest of the 50DMA (now around 1190) before the S&P 500 makes additional progress penetrating the new trading range. The index closed just a few points below the presumed support of that trading range.
The volatility index exacted revenge today by surging an amazing 22%. It closed directly at presumed resistance from the floor of the VIX’s previous trading range. VXX rose 11% and placed my puts back into the red. I am a little concerned about these large one-day surges: I expected volatility to continue declining without much excitement like today’s. If volatility follows through with a lot more upside, I will begin to worry that the 50DMA will not provide a launching pad for the next leg of the rally. We will just have to wait and see. T2108 trading is always day-to-day.
Bond and currency land provided additional drama. The euro was crushed under the weight of sellers as traders rushed back into the dollar’s cold embrace. The Japanese yen intervention exaggerated the dollar’s strength as, presumably, the Bank of Japan orchestrated yen weakness by buying U.S. dollars with yen. With the wind at its back, the dollar index jumped back above the 200DMA. The euro lost 2.3% against the dollar (see FXE, the Rydex CurrencyShares Euro Trust ETF). For more currency commentary see “Yen Intervention Just As Dollar’s Relief Rally Ends And Gold’s ‘Bubble’ Unpops.”
I have not watched bonds too closely this year except to check occassionally on my hurting position in the ProShares Ultrashort 20-Year Treasury (TBT). Seeing the stubborn strength in TLT, the iShares Barclays 20+ Year Treasury Bond Fund, has finally awakened me to its hedging potential. TLT soared 4% today, a big one-day move for a bond fund. It is now above its 200DMA again. Over the two month swoon in the stock market in August and September, TLT gained a startling 30%. While VXX gained 142% over this time, I like TLT as a hedge because it is much less likely I will wake up one morning to find it down 10-15% overnight. In other words, VXX is more for speculation than hedging. Anyway, stay tuned on this one!
Charts below are the latest snapshots of T2108 (and the S&P 500)
Refresh browser if the charts are the same as the last T2108 update.
Daily T2108 vs the S&P 500
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
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 puts on VXX, net long U.S. dollar, long TBT, net short yen and euro