Weekly Market Commentary

The quiet sleep walking phase of the market seems to have ended, although that doesn’t mean that the bulls have relinquished control. The market sold off rather heavily on three of four days last week, culminating with Monday’s sharp decline. However, a strong rally has followedthat decline, although $SPX did not regain its highs (the Dow, however, did recover to new post-2007 highs). With Sequestration about to go into effect, it seems that some selling was in order.

The chart of $SPX has widened out a bit, with support at the weekly low of 1485 andresistance at last week’shighs at 1530. In between, the market can move freely and with a great deal of speed, as it has already shown that it can traverse nearly the entirerange in a couple of days. The 20-day moving average of $SPX is beginning to roll over, but that isn’t bearish by itself. Many of the indicators took on a bearish tone when the market turned down, although not all have retained it.

We have commented in the recent past that there has been a lot of protective put buying. That has raised the level of the put-call ratios, even during a time when one would have expected speculative call buying with the market near its highs.

Volatility indices ($VIX and $VXO) have had extremely wild action. $VIX exploded from 12 to 19 in just a few days, and then fell back to almost 14. That spike peak in $VIX was a buy signal for stocks. If $VIX can quickly regain the 16 level and trade higher, it would be in an uptrend and thus a bearish sign for stocks.The construct of the $VIX futures has taken on a much more bearish tone as well. During the short-lived market decline last week, the front two month futures both traded at a discount to $VIX. If the term structure inverts and begins to slope downward, that will be a very bearish sign.

In summary, the bears may have dropped the ball this week but they are likely to get another chance very soon.