When I was younger I always wondered what this meant, then my dad once warned me – ‘watch your back’. It kinda makes sense, Caesar lost his life because he didn’t watch his own. As it relates to markets, we have seen March historically be rough sledding in recent times. In 2009, the SPX cascaded down to the magical 666 number before starting on a fierce journey to where we are at today. In 2011 a tragic tsunami struck in March that rose volatility to much higher levels, reaching a zenith later in the year. In March 2000 the tech bubble imploded with a 26% Nasdaq loss in one week and for all intents and purposes a nasty three-year bear market had begun. While forces within markets are strong today (see: Fed and liquidity) there is no denying this month could be the most cruel for bulls and bears alike.
This past week was far more active in terms of volatility than we have seen all year. The VIX was the lightning rod, moving an astounding 35% on Monday (from 14 to 19, only to back down sharply the rest of the week and close under 16. While that could be a concern my focus is more on the VIX futures (see graphic), which is back to portraying a normal, bullish construct with premium. This term structure represents a bullish scenario for stocks. As an aside, the VIX on Monday moved HIGHER than six futures, which is quite rare, but now it is back to ‘normal’.
What happened this past week, and what signals are being telegraphed on the horizon? News has been the big influence on markets, and as usual anything perceived to be negative will be sold indiscriminately. For the year the markets are up 7% or more and the Dow Industrials are within spitting distance of an all time high. Sentiment had soured recently with put/call ratios elevated and some of the more popular polls like AAII showing a dramatic fall in bullish support. In addition, money has been flowing out of equities at a fast pace. No surprise there. The technical condition of the market is not horrible but may be showing some signs of fatigue. However, the support of liquidity by the Fed reiterated by Ben Bernanke this week should make the bears pause at every dip. Holding above some key moving averages during the recent 2.7% drop and then rising again may be a positive sign if the markets and news stabilize. The uncertainty is still out there, but let’s hope the markets do not meet the same fate as Caesar.