Does Volatile Action Indicate a Market Top?: Dave's Daily

Friday markets reversed course again and were hit hard, this time occasioned by a criminal probe of Goldman Sachs. How the mighty have fallen!
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Dave's Daily

By Dave Fry, founder and publisher of

ETF Digest

and author of the best-selling book

Create Your Own ETF Hedge Fund.

April 30, 2010

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DOES VOLATILE ACTION INDICATE A MARKET TOP?

It seems over the past couple of weeks the daily image and theme changes dramatically with Dave's Daily. Just when things start to go badly, the next day there's a reversal then the process repeats. It's getting so you can't trust the durability of your writing.

Friday markets reversed course again and were hit hard, this time occasioned by a criminal probe of Goldman Sachs. How the mighty have fallen! It's not good to be the low hanging fruit for regulators, politicians and a populist press.

More importantly markets are challenging investors' comfort levels. The "sell in May and go away" maxim is already being bandied about. The "January Barometer" (as goes January, so goes the year) was bearish but the year's not over; besides, that didn't work well in 2009. The "buy 'em in the fall and sell 'em in the spring" may be more valid. But, these are just sayings that get whipped-out when they seem apt as some do now.

Below is a chart of SPY during the 2000 period when conditions became extremely volatile. Not many periods matched it in that regard and the current action has a ways to go to match it. Nevertheless, check it out for wild two-way action that ended in the brutal 2000-2003 bear market.

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Volume today repeated the ongoing pattern of heavier volume on down days. This, of course means "distribution" which is never bullish. Breadth was as negative as yesterday was positive.

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The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE.  When readings are +60/-60 markets are extended short-term.

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Per Investopedia:  The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends.  I believe readings of +1000/-1000 reveal markets as much extended.

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Per Investopedia: The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge".  Our own interpretation is highlighted in the chart above.  The VIX measures the level of put option activity over a 30-day period.  Greater buying of put options (protection) causes the index to rise.

Continue to Major U.S. Markets

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Continue to U.S. Market Sectors, Selected Stocks & Bonds

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Continue to Currency & Commodity Markets

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Continue to Overseas & Emerging Markets

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Continue to Concluding Remarks

Did I really utter the words "market top"? Those are strong words that can quickly fade from memory. It's been a market afflicted by short-term memories especially this week. One minute you think everything's in the toilet and the next everything's coming up roses -- and repeat.

So April ends on a sour note for investors. Goldman Sachs is under criminal investigation but I wouldn't give much for the government's chances arrayed against the attorneys the company will field. Nevertheless, Goldman Sachs is the king of the street and its reputation has taken a brutal hit. Their market and deal-making abilities are unsurpassed. A loss by them is not a gain for financial markets since their skills are still needed globally. But, as the Chinese say: "Even the monkey can fall from the tree."

Looking forward business conditions appear improving, interest rates are low, earnings have been beating expectations routinely and things overall seem on the mend. Is that the sign of a top?

The Buffett love-in begins in Omaha this weekend and his eminence is expected to be asked a lot of Goldman Sachs questions. Remember, Berkshire has made a fortune on the investment so sanctimonious answers will seem silly.

The release of Fed minutes from five years ago sheds a lot of light on the housing bubble from 2004. Fed officials were worried about it but did little to prevent its growth as noted in this

Bloomberg

article.

May begins with lots of economic data beginning with Personal Income & Spending and ending with nonfarm payrolls.  There will be more earnings to digest as well.

Let's see what happens.  You can follow our pithy comments on

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Disclaimer: Among other issues the ETF Digest maintains positions in: MDY, IWM, QQQQ, GLD, UCO, DGP, FCG, EFA, EEM, URE, AGQ, EWY and FXP.

The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell any security.  Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period.  Chart annotations aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at

www.etfdigest.com

.

Dave Fry is founder and publisher of

ETF Digest

, Dave's Daily blog and the best-selling book author of

Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management

, published by Wiley Finance in 2008. A detailed bio is here:

Dave Fry.