The exceptionally high correlation in market performance has made it increasingly difficult to find stock charts that provide insight as to what may be coming next. Stocks and commodities all have been going in one direction as Treasuries and the dollar move in the other, leaving little chance for investors to add value through either research or technical analysis.
Still, there are a few charts that bear watching for those trying to determine whether we’re destined for a late-year rally or just more churning within the S&P 500 range of 1,100 to 1,200.
First is the CBOE Market Volatility Index, the VIX. Since the markets began to collapse in early August, the “fear gauge” has moved within a tight range of 30 to 45. The VIX now stands on the cusp of moving below 30 for the first time in two months, which would indicate that investors are finally ready to begin increasing their risk exposure again.
This is an important development, since the last two times the VIX moved above 30, it held there for several months, then broke back into the 20s (early 2009 and mid-2010) and continued to decline for another 10-12 months amid persistent strength in equities.
The second chart worth watching is investment-grade corporate bonds, as expressed by the iShares iBoxx $ Investment Grade Corp. Bond Fund (NYSE:LQD) exchange-traded fund. This market segment hasn’t kept pace with high-yield or equities in the “risk-on” trade of the past few weeks, and it remains close to breaking under its 200-day moving average. Investors should be alert to the action in LQD, since it is extremely unlikely that stocks can sustain a rally at the same time as corporate bonds are breaking down.
The next two charts are economic indicators that provide better real-time feedback than the monthly data that receives so much attention. First is the Baltic Dry Index, and the second is rail traffic and volume in the U.S.
A look at these links will show that the BDI has risen nicely in the past few weeks despite the continued glut of shipping capacity, while rail volumes have moved out to new highs. Both of these charts show that the widespread concerns about a recession may be off the mark, meaning that if there is any progress toward a resolution to the European crisis – thereby taking that issue of the table – we’re left with an environment of slow, steady growth, ultra-low interest rates, reasonable valuations and healthy corporate earnings. This combination could well send the markets on course toward retaking their highs from earlier this year.
The last group of charts is largely coincident indicators – as these go, so goes the rest of the market. As a result, they won’t provide much of an early warning for investors. Nevertheless, they do offer more insight into the European crisis than you can gain by simply reading the headlines or watching the broader indices. The first is the iShares MSCI Europe Financials Sector Index Fund (NYSE:EUFN), a little-known ETF with more than 100 holdings. The large portfolio means that the ETF tracks not just the largest names among European financials, but also the smaller institutions that are most likely to feel the pinch if the crisis intensifies.
Investors should also pay attention to the charts of the credit default swaps of Italy, Spain, and Greece. All three are readily available for individual investors, allowing you to keep your finger on the pulse of what’s happening in Europe. Virtually any trade you can make is ultimately tied to the direction of these three countries’ CDS, so use these to your advantage.