The last hour of trading on Wednesday was marred by swift, high-volume selling, an extremely rare sight in the current market. It seemed to come from “nowhere” but the signs of some kind of reversal have been building in some poor post-earnings trading in many big-cap names. I earlier pointed out that Intel (INTC) seems to have printed a near-term top. Tradermike does an excellent job in compiling the poorly behaving post-earnings charts of several big cap stocks, and he includes evidence from the indices that some kind of key reversal may be in the making. While I thought that INTC’s stellar headline results signaled an earnings-related correction is no longer likely for this Fall, Doug Kass chronicles how this earnings season has actually under-performed despite some of the gloss we see from the headlines: “The Earnings Season Racket.”
In my scramble to make sense of it all in the final hour, I checked on the VIX. Sure enough, volatility spiked upward. The VXX, an ETF that somewhat tracks the VIX, has printed yet another potential (near-term) bottom. The chart below shows a hammer pattern often associated with bottoms. The volume traded on VXX was the highest by far over its entire 8 months of existence. This volume surge adds further weight to a potential bottom.
*Chart created using TeleChart:
Given the mounting evidence, I decided to give VXX one last chance as a play on a potential reversal in the markets. I dismissed VXX earlier this month as it failed miserably to keep up with the spike in the VIX during the selling that opened October. Note well that VXX demonstrated yet again how poorly it performs relative to the underlying VIX: today, VXX was up a mere 1.9% while the VIX soared 6%. Yet, as part of a mix of tools for playing a correction and/or increase in volatility, it has its place for a short-term bet.
As always, follow-through is key here. If buyers promptly step back in with all the liquidity that has been applied to the markets for months now, Wednesday will quickly become another forgotten day where the market had a brief hiccup. Regardless, these final days of October will mark the end of my watch for a Fall correction. After this point, I will not become bullish (well, unless we trade down to 800 or so on the S&P 500…but that is very unlikely to happen this year, if ever). Instead, my trading and investing horizon will get even more short-term than it already is, as I expect the numerous points of structural weaknesses in the American economy to play themselves out somehow and sometime in 2010.
Be careful out there!
Full disclosure: long VXX, long puts on QQQQ and SSO