Monday, December 21, 2009

Stock Market Update

It's confessional time and we make no bones about it.  We missed the stock market rebound this year.  We did not think stocks would go down necessarily, we just decided to not take on any big stock trading positions either long or short this year.  Luckily, we caught the rebound in several commodities and also managed to time the rise in gold nearly perfectly so don't be fooled - we will indeed have a very merry Christmas.

With that disclaimer out of the way, I wanted to provide a quick stock market update in regards to two technical indicators that we watch.  On October 25th, we noted that the S&P 500 was rapidly approaching its 500 day moving average. We believe that this is an important technical level for the stock market because throughout the bull markets of the 1990s and 2003-2007, the S&P 500 stayed above this level. The market also stayed below this level during the bear markets of 2000-2002 and 2007-present.

Since that time, the S&P 500 has risen cleanly above its 500 day moving average:



On October 31, we noted that volatility skyrocketed as stocks sunk.  On that day, the volatility index (VIX) rose nearly 24% and broke out of its downtrend.  We stated that unless the VIX fell back down to the low 20s (from 30 at the time) that stocks were likely to continue falling.  Much to our chagrin, the VIX fell 5.49% today and closed at 20.49:



Taken together, both technical indicators point towards continued strength in stocks.  One can come up several indicators that present bearish stock cases (a breakout in dollar being a big one) but at the least, there is just not a convincing case to be made that stocks are going to crash any time soon.
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