Wednesday, February 15, 2012

Is It Time To Sell?

For the last few days, I've been concerned about the strength of the market rally (see here and here).  An article by Andrew Mihaydari lays my concerns out:
Reality has caught up to the runaway market. Economic data here at home are starting to disappoint as the temporary tailwinds of savings drawdown and inventory restocking fade. Witness Tuesday's retail sales miss or Friday's poor trade report. Data are weakening overseas as well, with activity slowing in key economies, including those of Japan and Germany.

The situation in Europe is deteriorating, with analysts at Moody's downgrading the credit ratings of a number of countries Monday night, becoming the first agency to call into question the creditworthiness of the United Kingdom. Greece is fast approaching the precipice. Its coalition government is weakening from the intense popular uprising against additional budget cuts. Participation in its critical debt restructuring deal is reportedly weaker than expected. And now, a chorus of eurozone officials, including the finance ministers of Germany and Poland, is playing down the negative effects of a Greek default and eurozone exit.
Mr. Mihaydari does some very nice analysis -- at the heart of which is a combination of fundamental economic and technical analysis.

His analysis focuses on the VIX -- the volatility index -- or, more importantly, a recent spike in that index.  He notes research that shows the following:
But here's the really interesting thing. History suggests the losses are just getting started. The folks at Sundial Capital Research crunched the numbers. Looking at examples like now (a VIX spike after stocks set a six-month high, resulting in a shock stock market close at a five-day low) since 2009, it's happened six times with loss of at least an additional 3.8% at some point over the next three weeks.

This has happened 10 times since 1969, when investor sentiment was very optimistic, as it is now. Looking 19 days after the event, the S&P 500 was positive only 2 out of 10 times, with an average maximum loss of 6.2%. Not good.
By way of rebuttal, however, consider this.  As noted by Bepsoke investment group, sovereign yields in European countries have been dropping.  This tells us that the "bond vigilantes" are not out in force in Europe -- at least, not yet.

I offer the above only to add more data to the thought stream.  As my market posts over the last few days show, I'm also concerned about the latest rally.