Thankfully the slowest trading week of the year gave us a diversion like the GOP convention to keep us busy or entertained. You’d think not a lot would happen last week but something did. Two weeks ago markets hit a near-term peak and last week we showed you the European calculations that suggested a high was in place. Markets started out going sideways, but there was an invisible ceiling keeping them down. Our trust and patience in our calculations was rewarded as markets starting backing off from their highs.
To be sure, markets have not collapsed nor should they have given the light volume. But at nine days off the highs, something is materializing. It’s also strange that markets can’t seem to get a big going with the Greenback setting new sequential lows. In case you noticed for the past couple of weeks, the Greenback and Aussie Dollar have been going in the same direction, which is down. That’s rare and suggests one is in a sideways pattern that hasn’t materialized yet because when instruments that normally have inverse relationships go the same way it’s not a coincidence, one is moving sideways.
So here’s what we were concerned about last week. How could US markets continue higher with China setting new lows? That resolved itself. How could we have a VIX stay at the lows with a market that was flat? That resolved itself. Finally, we had a mild tell with the Hurricane active in the Gulf and oil prices did not spike. The psychology of the stock market at the time of disaster is a good indicator of what oil will do and in the void, what the oil market tells us is also an indication of where the stock market is at. In this case, markets came off highs and the oil market refused to stage a big bounce despite the fact drilling and refining took a 1 to 2 week pause. The media presented it as a small storm caused little damage. They can spin it anyway they like.
The one thing I’m not sure about was whether Friday’s up sequence was any referendum on Romney’s speech. I tend to doubt it. Too much confusion coming out of the convention along with the fact the race is still too tight to call. We’ll see more in a week after the Dems light up North Carolina. Is anything at that convention applicable to our work? A flat to slightly down market might indicate why the GOP only got a small bump. It used to be the challenging convention went in July and the bump was bigger. But the fact this convention played out the last week of August while people were on the final vacation of the summer might mean a lot of folks weren’t paying attention.
Next page: What else it means...
It also could mean people are still mixed up. To use a sports analogy, all other things being equal the road team usually needs to execute a flawless game plan to win. In terms of recent challengers to one term Presidents, Reagan and Clinton ran great campaigns and defeated the incumbent. If this election is about the economy the GOP spend an inordinate amount of time focusing on social issues like abortion and immigration. Their whole first day was about their platform. Experts thought the platform would excuse instances of forcible rape but the GOP stayed true to their long term roots on that issue. The GOP guest speaker was none other than Dirty Harry himself. Romney’s cause was not helped by an improvisation that lent itself better to the Oscars extravaganza as opposed to the Republican convention. The Dems guest speaker is none other than Sandra Fluke who was made the poster girl for contraception and women’s rights. Normally it would be fluke to think this girl would stand a chance against a great American icon but this is no ordinary Fluke. The GOP gave the Dems an opening, they should exploit it this week.
On the slowest market week of the year, thank goodness for some controversy!
If there’s anything good that came out of last week was the rise in the VIX. With a market that didn’t fall very much, the VIX was consistently up all week. That’s a good thing and maybe a great thing. If this were to continue we could see a market that didn’t drop very much with a VIX that could be over 30 in a month from now.
I’m not sure what options players are afraid of but the higher this goes the greater the chance we have of putting in a low when the time windows start hitting about a month from now.
By the way, a little strategy play which is what we teach clients. I’m putting it in because it’s a textbook lesson. When we get near lows and the chart bounces and then FAILS POLARITY the higher probability is it takes out the prior low. In this case the Greenback did just that even as it retested the little polarity another time. It would not budge above it. The Dollar is trying to find a low here, lets see what happens.