Thursday, September 18, 2008

A Few Stock Market Perspectives

In our top chart, we see the S&P 500 large cap index (top pane), with the ratio between the weighted version of the S&P 500 Index and the unweighted version in the bottom pane. Note that, since January, the unweighted version has been showing relative strength compared with the weighted version. Interestingly, that January low was also the point at which the greatest number of S&P 500 stocks made 52-week lows. Since that time, weakness has been greater in the largest of the large cap stocks, weighing down the weighted version of the index. Another reflection of this dynamic is that the advance-decline line specific to the S&P 500 stocks has not yet broken beneath its July low. Just as the smallest of the large caps have outperformed the mega-caps, we've also seen relative outperformance among the S&P 600 small caps, as noted in a recent post.

The bottom chart takes a look at the ProShares Ultra Long S&P 500 ETF (SSO) and the Ultra Short S&P 500 ETF (SDS). These have become popular speculative vehicles for both hedging and directional trade, given that they move roughly twice as much as their underlying index. For this reason, total volume between SSO and SDS (pink line) is a nice indicator of speculative fervor--and we can see how this, like VIX, tends to rise when the market has been weak (blue line). Wednesday's volume between the two hit a record, showing tremendous speculative activity (which I interpret as aggressive shorting and fearful hedging). Note how total volume between the Ultra ETFs has also tended to be muted at relative market peaks.

Finally, thanks to the MoneyShow folks for making my talk at the Las Vegas Forex Expo available as a webcast. In these turbulent market times, the topic of coaching oneself seems particularly relevant.