Volatility came back with a vengeance this week with 20+ pt daily ranges. Friday the range began to contract slightly. Will this lead to a decline in the VXX and VIX next Monday? The S&P continues to have trouble with the 50% retrace of the current decline, but we continue to be very news driven. As a late WSJ. article drove the S&P up 10pts late Thurs. Everyone is looking at the latest “W” bottom. FOMC, SPY dividend, and option expiration hopefully will continue to provide volatility going forward. On a side note, FB will have a new product event on June 20th.
After being strongly oversold the market has bounced back quite nicely the last 1½ days. The effect has basically been to work off the oversold condition and leave several indices just a little above their 10-day moving averages. In other words, it has been a quick trip from near-panic to fairly neutral. Had the reversal not been so strong then the current upside potential would be a little better. But since the move was so good (and I’m not complaining), it took out much of the upside edge. I demonstrated this in last night’s subscriber letter.
After tagging the 50 day moving average, markets gave a ferocious bounce on very oversold breadth reading. There are two scenarios that are unfolding now. One is the high on this bounce will be put in between Monday and Tuesday before a retest of the low. Another is a retest of the 1630 area and stabilize before we challenge yearly high. Either way, I believe July will be very volatile as we anticipate tapering discussion during the September FOMC meeting. VIX also put in a reversal at today’s close which is generally bullish. In addition we will have SPY dividend and futures contract roll over this week and may contribute to large movement.
During long-term uptrends, reversals from 20-day lows like we saw on Thursday often succeed in delivering further gains.