Dr. Sassouni's Profit Prescription
Before we get into the next chapter of the "great VIX debate," I've got to let you know about a fantastic research coup we've just pulled off for subscribers. Dr. Chris Sassouni -- the leading independent analyst on the healthcare industry -- is now a part of 21st Century Alert. You can find his work on our web site right now, as part of your existing subscription.
Chris has posted a can't-miss white paper on the trends that will define healthcare investing over the next 20 years. This is a tremendously important paper, and I urge everybody to read it carefully. The underlying growth fundamentals in healthcare are undeniable, and this area will undoubtedly be one of the only safe havens for your long-term investment dollars, even in an extended bear market.
We're very excited to have Chris Sassouni to help us navigate this critical area. Healthcare investing is not for amateurs, as there is much specialized knowledge needed for success. Chris has been a top institutional analyst and now runs a boutique investment research firm catering to hedge funds and institutional money managers.
But Chris and I have talked many times about how the institutional side is overlooking the true gems in healthcare investing, because many of these companies are just too small for them to invest in. If a company has a market cap under $250 million, then the big players on Wall Street can't be bothered, as it's just not big and liquid enough for them.
But this is our opportunity! Over the coming months, you can expect Chris to really let you know about the most exciting healthcare companies that are below the radar of Wall Street.
What a Bull move really looks like
Over the last few weeks, the market hasn't really done much of anything in terms of price movement. The S&P 500 (SPX) has just decided to "stay home" in the vicinity of 876, waiting for the next dose of energy. We're still waiting.
In this vacuum of information from price action, all eyes have turned to the Volatility Index (VIX). I have never seen so much focus on the VIX. I've also never seen so many half-baked and less-than-rigorous arguments. The bulls are doing tremendous amounts of hand-waving to explain how "this time is different", and the crux of their argument seems to be that now too many people look at the VIX, rendering it ineffective. I've seen this point made countless times.
But there's a big problem with this argument. It doesn't matter how many people look at the VIX. Everybody could look at the VIX, and it wouldn't matter; just as everybody looks at the price of the S&P 500 and that doesn't matter either. Looking at the VIX is a very different thing from really knowing how to profit from it.
All this debate about the VIX actually proves my point. Everybody has a different opinion. There is absolutely no consensus on how to interpret its movements. So it's certainly not going to be over-subscribed right out of a job. Indeed, I can distinctly remember precisely this debate way back in February 2001, and that was about five VIX cycles back. If anything, the VIX has worked better since then.
But let's back up, and go over it some more. When I say the current action of the VIX is making me incredibly bearish, I'm not simply reacting to the plunge in the VIX from 40 down to 24. This doesn't have to be a bearish thing, in and of itself. No way. What is significant is how prices have failed to respond to the upside during this mammoth drop in the VIX. A rising tide of bullishness in the face of eroding prices is the hallmark of a vicious bear market.
I've shown you enough evidence of how this has played out over the last 3 years. It doesn't end well. This time should not be different.
But it would be useful to this great debate to look at how the VIX should be acting if this were indeed going to be a significant bull move to the upside. There is also a very characteristic bull market sentiment footprint, and not surprisingly, it's the polar opposite of the bear market patterns we've been observing.
If sentiment were a positive for the markets, then the VIX would be jumping on any little setback. People would be quick to believe the worst is right around the corner, and would be constantly getting themselves ready for the big wipeout coming. Even the smallest sell-off would be causing major alarm among traders and investors.
Let's look back at the last really great bull run for the markets, back off the October 1998 bottom. Essentially, the market went straight up for a full year off that low. It was an epic bull move. Here's how it looked:
Now let's check it out with the VIX overlayed.
You can see clearly how every little pullback in this uptrend was met with fear. Every single time prices dropped, the VIX spiked. Yet price held up, every time. There were a series of higher highs and higher lows, accompanied by a constant re-filling of the sentiment tank. This is the mythical "wall of worry," in living color. People were worried about the potential for a major decline, yet the market kept blowing them out of their puts and short positions.
Are we seeing anything like this now? No way! The VIX is plunging, and it's even going down during pullbacks. Now that the Iraqi war is over, people are gung ho for the markets, and there is a massive overload of bullish sentiment. Nobody is afraid of this market.
The market is going to take care of this bullish overload of sentiment, without a doubt. That much we know. But what we don't know is when this process is going to start. The momentum on the VIX is still down, towards rising bullishness. The market is sucking in every last bullish dollar. It can keep going this way for weeks, with the markets continuing to grind away at overhead resistance. But upside potential is limited, and in my opinion chasing these last few points is a very dangerous game. It's high-risk/low-reward.
So the VIX "won't matter" until it does, and then at that point it will be the only thing that is important.
Sentiment Dashboard
By Adam Oliensis
SENTIMENT TANK: The tank drained another 2% to 10% full of negative sentimenton Monday. The last time the market was this drained of negativity was just before the June-July '02 crash from SPX 1050-1100 down to 768.
SHORT-TERM: The hourly gauge remains in a weakening advance phase .
MID-TERM: The mid-term gauge progressed 1 point to 99% in its extremely mature uptrend. With the tank down at 10% and the mid-term gauge at 99% the market's "empty" light is flashing and the car is wheezing, coughing, knocking, and spitting oil. Our Confidence Diffusion Index (CDI) is unchanged at 3 (out of 7). We're extremely ripe for the gauge to roll over and for the CDI to drop into a decline phase with it.
LONG-TERM: The weekly gauge popped another 11 points to 81 % in its advance phase. Our weekly CDI is unchanged at 4 (out of 7). The weekly gauge has moved from a decline phase up into a new weekly advance phase that has now become somewhat extended without enjoying the windfall of breaking price resistance levels. The most likely course still looks to be for the weekly gauge to pull back within its advance phase as the market endures a mid-term decline phase, which we believe is imminent.
BOTTOM LINE: We're looking for this mid-term advance phase to exhaust itself and for a new mid-term decline phase to begin sooner rather than later. Given some of the underlying technical strength of the market, we would expect the weekly advance phase to survive the mid-term decline. Should the long-term advance phase indeed survive, the next (possibly important) buy signal would be likely to emerge at the expiration of the anticipated mid-term decline.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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