Trend Check with Tushar Chande

If You Only Learn One Lesson From This Sell-off (Learn This One)


The recent sell-off in the market is among the worst 10 sell-offs since 2010 (see Chart 1), which means a rebound cannot be too far away. The all-important gauge of market skittishness, the $VIX, has not exceeded the level of 50 identified as the peak in my previous post, and has now closed below the five previous closes, implying that the most intense selling panic is probably over (see Chart 2).  The bottoming process is not complete, and may take various forms, and depends on  whether we get a "V" bottom or a re-test of the lows over the next 1-4 weeks (as in 2015-16) or longer (2010, 2011).   The all-important lesson for us regular guys and gals: Never Short Market Volatility.


Chart 1: The 12-day rate of change of the S&P 500 index reached the lows observed in the 10 worst sell-offs since 2010.


Volatility Eases

The fear or frolic gauge of market sentiment (see Chart 2) has closed below its highs four days in a row, and below its five previous closes.  In the past this has generally indicated that the worst of the selling pressure has abated.  This does not mean the market itself cannot drift lower,  but only the short-term intensity of selling has simmered down. The market impact of the blowup in volatility was felt in the short-VIX short-term futures ETN, which collapsed quite dramatically, showing again the hazards of betting against market vol (see Chart 3).


Chart 2: The $VIX index of fear and panic has not exceeded its recent highs and closed below its previous five closes.  In the past this has generally meant that the paroxysm of selling has ended.  (See a live chart here.)


Chart 3: XIV, the short VIX short-term futures note just got destroyed.  As many an option trader has learned to their regret, unless you are a pro, do not short market volatility.  When the herd wants to leave the arena, the exits are awfully narrow.


Estee Lauder Looking Pretty as Ever

One chart that is looking quite nice is that of Estee Lauder, which has held up beautifully through the sell-off.  The uptrend looks intact and the selling has been well contained within sight of new highs.  The Chande Trend Meter remained green throughout the uptrend and the market swoon, so the stock should be improving its relative performance big time.


Chart 4: Estee Lauder chart is as pretty as any in the S&P 500 right now.  (A live chart is here.)


Defense Stocks NOC and RTN Also Hold Up Well

Two defense related stocks that have also held up well are NOC and RTN.  So long-term investors may wish to study them as well.


Chart 5: Key defense stocks have provided good portfolio protection.


Vanguard BND Total Bond Market Fund Approaches Key Support

The massive Vanguard BND Total Market ETF is approaching key support.  The bottoming process in the stocks will be influenced by what bonds do at these levels.  The bond pros have been promising a wall of buying once the 10-year yield gets to the 3 percent area and what not.  If bonds rally, that will help erase some of the fear of rising rates and help equity markets as well.


Chart 6: The massive BND ETF is approaching key support and its action here is worth watching for clues to stock market action. (See live chart here.)


A Recession Is Not Imminent: So Forget Bear Market Chatter

The bear-market refrain has started up again, as it does after each sell-off.  True bear markets coincide with or slightly lead truly awful economic conditions.  The latest Atlanta Fed GDP Now forecast is positive and well above zero.  The St. Louis Fed recession probability is at 0.46% which is essentially zero.  The Chicago Fed National Activity Index (CFNAI) shows a pick-up in US activity in December.  Naturally, these data are revised each month, and some, like the GDP now and CFNAI settle-out only 3 or 4 months later.  Anyway, it seems way too early to call for the next US recession at the moment. 


Looking Ahead

The bottoming process alluded to in my previous post continues, and though we made some lower lows than I was hoping, the closes stayed near the 2600 level on the $SPX.  That is how it goes, and now we have to wait to see how the market wants to handle its test of the 200-day moving averages by key indexes.

I hope the long-term perspective of this post will help to give you a much wider view of the recent market action and the macro-economic references will place the recent action in a broader economic context for you.

Thank you for looking in, and I hope you have enjoyed the discussion enough to subscribe to the blog using the very quick link below.



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Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions. Learn More
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