Market Watch:BKX RKH VIX

Here's an interesting tidbit I pulled from Reggie Middleton's BoomBustBlog. As I have said often Goldman Sachs is the leader of the financials and the financials in turn lead the DOW (25% of DOW) which however fraudulently leads the NASDQ and S&P500.  In other words a leader of stock market leaders, as such Goldman is an early warning indicator, and I am all about early warning indicators. The article below shows you (hands on) how to use two other early warning indicators, Divergence and Relative Strength.

First chart: S&P 500 against the VIX volatility index, (Hourly Chart, Feb 09-Present Day)

The VIX volality index is a tool to measure investor fear or lack of fear (complacency) in the stock market. In general, when the markets trade lower, investors fear the market and the VIX rises; conversely when the market rises, the VIX index should fall. This chart shows the S&P 500 (black/red line) rising since the March 9th 2009 low, as the VIX (light blue line) falling as investors become increasing confident in the stock market. It's important to note divergences in various types of charts, they tell you something may be changing in the underlying internals of the stock market, even if the stock market's price has yet to change.



You can see starting in March the market internals had changed (marked by green notes), the VIX was not marking higher highs as the market was making lowers... in essence major investors weren't fearing the lower prices, but rather using them as a buying opportunity. Since that March 9th market low, everytime the VIX made lower lows, the S&P made higher highs... that changed this week.

The descending trend channel (dark blue lines) aims to capture the methodical downward movement of the VIX (or increasing investor confidence). On May 20th that sharp spike below the bottom trendline illustrates major complacency by investors, yet the S&P 500 did not confirm investor confidence with higher prices in the S&P 500. The negative divergence (marked by red notes) in the S&P 500 chart against the VIX becomes a signal that a trend change may be in the works.


Second Chart: S&P 500 against Banking Index (BKX) and Regional Bank Holders ETF (RKH), (15Min Chart, 10 prior trading days)

Not much to this chart, but paired with other things going on technically in this market, it is very interesting. Just before the March 9th lows, there were 2 or 3 trading days (not charted) where the commercial and regional banks demonstrated noticeable relative strength compared to the overall markets. Since those lows, the banks have led the markets higher. Over the last 2 trading days, the market (black/red line) continued to move higher, yet the commercial banks (blue) and regional banks (orange) are relatively weak overall. Anyone who saw this developing on May 18th was able to initiate short positions in the banks at the open, May 19th.

These relative strength charts can be great tells for the overall market, last year in April and May 2008 (not charted) as the market rallied, the regional banks and housing stocks did not participate, which gave an early indication that rally was not a continuation of the bull market, but rather a weak bounce in an emerging bear market.