Fear as measured by the VIX Index fell by nearly one third in less than two weeks as the markets marched higher for seven consecutive days. Investors went from panic to euphoria, quicker than you could say “it’s a new bull market.”
I don’t believe things are quite that simple. I still believe that we are mired in a long term secular bear market and the run up from March 2009 to April 2010 was a snap back rally. I also believe that rally has ended and we are going to take out the July 1st lows shortly.
The pathetic volume associated with the recent rally is significant. The poor economic news releases are flashing warning signs. The fact that markets are forward looking six to nine months coincides with the start of higher taxes that are to take effect on January 1, 2011.
Technically the market looks like it is stalling out right here. The fear that investors will come to understand that this rally has failed will be huge. We took a position on the VXX exchange traded fund in anticipation of fear (or in my opinion reality) coming back into the markets.
VXX can be bought here with a stop just below $24 with an 8% risk. A looser stop could be $23.60 for about 10.5% risk. There is a nice bottom of support formed by these lows as seen on the chart above, dating back to the beginning of May.
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