Tuesday, March 15, 2016

Cracks in the Armor?

We're starting to see some cracks in this bull run off the Feb 11th intraday lows.  We have seen breadth start to dissipate in the last few trading sessions as stocks making 20-day highs (944) peaked out on 3/3/16.  Meanwhile, when the S&P made a new closing high on Friday 3/11, there were only 508 stocks making new 20-day highs.  A negative divergence for now.

The Russell 2000 has now closed definitively below the 10-day moving average.  This has served as a nice short-term trend following tool after strong thrusts in either direction.  As much as the 10-day acted as resistance during the move lower in the beginning of the year, it acted as support on the rally. The Russell is the first of the big four index's to have a definitive break of its 10-day.  It also led the charge higher off the lows which may make this even more important. 

Today we ran a study on pure price movement in the S&P 500 and coupled it with the level of the VIX to see how markets have reacted after a 10% or greater up move in a month.  The motivation being that the market is now a month removed (22 trading days) and 11% higher from its intraday low on Feb. 11th.  So we did this by looking at the S&P and VIX since 1990 on a rolling basis and examined price return from a day's close versus the intraday low 22 days prior.  Below are the results.

A few observations:
  • Expect some short-term weakness after a one-month 10% up move.
  • Strength begets strength looking further out
  • A higher VIX is more favorable for higher returns
We remain overbought on most indicators that we follow and have some significant overhead resistance nearby.  The potential reward-to-risk at these current levels has us feeling more patient here in the short-term.  

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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