Market Commentary (10/10/14) - $SPX $SPY $IWM

Are you dizzy yet? The equity markets have seen increased volatility these past couple of week with the market rallying hard on Wednesday afternoon following the Fed minutes, only to give back the entirety of those gains the next day. Today, the market made new lows and ended up closing on dead lows.

The decline in the market is being attributed to fears concerning slowing global growth, the Fed finally taking away the magical punch bowl, probable rate hikes next year after 6 years of ZIRP, Ebola (or so I was told), the fact Katy Perry will perform at this season's Super Bowl halftime show, the unstoppable strength in the dollar, and just because. All said and done, the Nasdaq was down 4.4% this week, IWM was down 4.47%, SPX was down 3.1%, and QQQ was down 3.77%. To get a sense of the action these past weeks, take a look at the performance chart below for the past 3 weeks below:

3-Week Performance Chart

In all seriousness, though, there are some signs that concern me going forward. I'll lay out some of them below. I will say, though, that I agree this isn't the ideal place to initiate shorts - after the market has now pulled in 112 handles from its recent highs, but I am bearish on the market for the first time in a long time. If we bounce and start to reclaim levels, I have no problem switching my bias, but as things stand now, things don't look good. This isn't to say we have to have an '08 type crash, but strictly from a risk/reward standpoint, the long side is not favorable here and now in my opinion. Here are some reasons I feel this way:

• The VIX (CBOE Volatility Index) closed above its weekly 200ma for the first time in nearly 3 years. While I typically don't consider moving averages to be exact levels (more as "zones"), the weekly 200ma has acted as nearly perfect resistance for the VIX these past couple years, making it a level of significance. The close this week above the weekly 200ma tells me there may be some staying power in volatility, opposed to the quick spikes we've seen lately that are quick to dissipate. 

CBOE Volatility Index (VIX) - Weekly Chart

• The S&P 500 Index (SPX) closed below its weekly 21ema (this is just the moving average I happen to use) for the first time since 4/11/14. However, this week's close below the 21ema was much more decisive than the most recent close below. You can also draw trendlines as well, and SPX broke below them too.

SPX - Weekly Chart

• The average true range (ATR, 14) continues to climb, reflective of the increased volatility that we've been seeing lately. I noted recently on StockTwits that spikes in ATR (& thereby volatility) have marked turning points recently. The fact that volatility uncharacteristically continues to climb may be indicative of further gyrations going forward. Generally, a gradual increase in volatility (expansion) is a bearish signal, whereas when the market advances, it typically does so in a type of "grind mode" with the occasional quick pullback that ultimately resumes higher. 

SPX's ATR (14) - Daily Chart

• SPY (the ETF for S&P 500) touched its 200sma for the first time since December 2012. In addition, the Nasdaq Composite Index closed below its 200sma for the first time since December 28,2012. This doesn't necessarily have to be a bearish signal, as the 200ma for both are still trending up, but this could change eventually. However, I think at a minimum it speaks to the change in character we're seeing. 

I know you probably feel like you hear this too often, but it bears (no pun intended) repeating especially now: understand who you are as a market participant, have a clear grasp of your true time frame, and let price be the final arbitrator. One of my favorite quotes comes from @millenial_inv post, saying "Risk can only be accurately assessed in combination with a time horizon." Awesome, right!

I'm still long a small handful of names after getting stopped out of some names already. I'm still long TWTR, CELG, and AAPL. I acknowledge the faulty action in CELG and the nasty move today in TWTR (down nearly 9%). For these positions, I'm only in half size currently or less after taking profits and/or trimming risk weeks ago. My trailing stops for all 3 positions are relatively close, and I have no problem getting stopped out of all three (which doesn't seem all that implausible). 

This isn't about me (or anyone else for that matter) getting a pat on the back for trying to pick a top in the market. I don't know if September's highs will mark "the top" (whatever that's supposed to mean). I just know that from my perspective, the risk/reward does not favor the bulls currently.