Chicago Board Options Exchange (CBOE) Volatility Index shows the market's expectation of 30-day volatility. It is constructed by using the implied volatilities of a wide range of S&P 500 index options. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Investors historically have believed that VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, complacent times in the markets.
The chart above is an update on the CBOE VIX study. TECH TALK analyzed the CBOE VIX in the previous issues and drew attention to the downward trend on the volatility index. The downward trend formed a clear parallel trend channel with the upper boundary at 32 levels. If we analyze the last three years data we can see that the VIX also found support at the 3 year long rising trendline at 25 levels. During the second test of the rising trendline the VIX broke down the support at 25 levels. We are now at 23.47 levels. Downtrend continues in the parallel trend channel. Values below 25 will be positive for the equities. Strong resistance is between 25-30 range.
10 YEAR U.S. TREASURY YIELDS
Sideways trends are regarded as consolidation periods where the price moves in a flat range without any direction. The consolidation period is bounded by two horizontal trendlines which act as support and resistance. A break above the resistance or below the support confirms the direction of the next major move. When the price has a direction this is called an uptrend or a downtrend. Similar to the sideways trend, both up & down trends are bounded by trendlines which act as support and resistance.
The chart above analyzes the 10 year U.S. Treasury Yields for the past two years. We can see two different trends where the price moved sideways in 2008 and moved in an uptrend in 2009. The sideways consolidation period was broken down in November 2008 at 3.2 levels which was followed by a sharp drop in the yields. The 10 year U.S. Treasury yields reversed from 2.00 levels in the beginning of 2009 and formed a clear upward trend in the last 7 months.
On the 20th of February FED officials announced inflation targeting. Fed Chairman Ben S. Bernanke said in a Feb. 18 speech "We expect inflation to be quite low for some time." On the 18th of March FED announced its treasury purchase program. However none of those critical decisions stopped the yields from rising in the last 4 months. The yields rebounded from a strong support at 3.2 in the last two days. As long as the yields hold above the 7 month long trendline support the direction will be upwards. Intermediate term uptrend remains intact.
DOW JONES TRANSPORTATION INDEX - DJT/DJI
The Dow Jones Transportation Average is a U.S. Stock market index of the transportation sector, and is the most widely recognized gauge of the American transportation sector. It is the oldest stock index still in use, even older than its better-known relative, the Dow Jones Industrial Average. The index is a running average of the stock prices of twenty transportation corporations. Top 5 companies according to their weightings in the index are as follows:
Burlington Northern Santa Fe Corp. (11.78%) railroads, FedEx Corp. (9.28%) delivery services, Union Pacific (9.00%) railroads, CH Robinson (8.04%) trucking, United Parcel Service (8.02%) delivery services.
Dow Theory was derived from 255 Wall Street Journal editorials written by Charles H. Dow (1851-1902). In Dow's time the US was a growing industrial power. Factories had to ship their goods to market, usually by rail. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. The chart above analyzes the Dow Jones Transportation Average and its relative performance versus the Dow Jones Industrial Average. The chart on the left hand side is the absolute performance of the DJT. The index peaked in May 2008 at 5,500 levels and dropped to 2,150 levels by the end of the year. We can see from the chart on the right hand side that during the sharp decline, the Transportation Average underperformed the Industrials. However in March 2009, both the absolute and the relative performance charts reversed to the upside. DJT reached 3,500 levels in May 2009. On the relative performance chart the Transportation Average outperformed the Industrial Average. In the last three months, both on the absolute performance and the relative performance charts we saw consolidation periods & range bound activity. Dow Jones Transportation Average moved in a flat range between 3,000 and 3,500 and the DJT vs. DJI moved in a contracting range (triangle). DJT is now breaking above its important resistance at 3,500. We need to follow a possible breakout on the relative performance chart to call for an outperforming period by the Transportation average.
NASDAQ COMPOSITE INDEX / DOW JONES INDUSTRIAL AVERAGE
The Nasdaq Composite is a stock market index of all of the common stocks and similar securities listed on the NASDAQ stock market, meaning that it has over 3,000 components. It is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. Since both U.S. and non-US companies are listed on the Nasdaq stock market, the index is not exclusively a U.S. index. Dow Jones Industrial Average is one of several stock market indices, created by Charles Dow. The average is computed from the Dow Jones Indexes by the stock prices of 30 of the largest and most widely held public companies in the United States.
In a business cycle, technology stocks are known to be popular during early to mid stages of an economic expansion. In today's volatile market environment there is enormous data and news flow being incorporated into our decision making process. It might be difficult to balance the forces coming from the positive and negative data and come to a conclusion. The chart above analyzes the relative performance of the technology stocks versus the Dow Jones Industrial Average. During the analyzed period between 1985 and 2009, we see a cyclical move between the NASDAQ Composite and the Dow Jones Industrial. 1985-1990 was an underperforming period for the technology stocks. 1990-1993 and 1998-2000 were two outperforming periods for technology interrupted by a neutral performance between 1993 and 1998. During 2000-2002 period technology shares massively underperformed the overall market. However starting from 2002, the NASDAQ Composite/Dow Jones Industrial Average ratio reversed and resulted in an outperformance by technology between 2002 and 2005. Three years of outperformance by the technology stocks was again interrupted by a neutral performance between 2005 and 2008. Since the beginning of 2009 we have seen the Nasdaq Composite outperform the Dow Jones Industrial. The ratio is now trying to break out from the last three years' consolidation range. An important chart to watch for the following months!
Aksel Kibar, CMT
Portfolio Manager
Abu Dhabi Investment Company PJSC
www.investad.ae/en/Home.aspx
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