For Now, the VIX is Sleeping

Earnings season plus the debt ceiling debate could make for volatile weeks ahead

   

After the fiscal cliff was resolved, at least for the moment, the SPDR S&P 500 ETF (NYSE:SPY) hit a new high not seen since 2007 and money started flowing back into stocks and ETFs.  According to data published last week, more than $18 billion flowed into stocks and ETFs the week of January 9th, some of the highest inflows of assets in 20 years.

Still, on a technical basis, stocks and ETFs remain stalled at significant resistance levels and will need to break higher for this rally to be sustained.  Major index ETFs, including the S&P 500, Nasdaq 100 and Russell 2000 are approaching short term overbought levels and so could be due for a pause or short correction, however, bullish sentiment remains strong and a break above current levels would likely lead to a sustained and possibly very strong rally.

On My ETF Radar

1 15 13 300x247 For Now, the VIX is Sleeping
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In the chart of the S&P 500, we can see how the index and its related ETF have returned to bullish status with an upside price objective of 1620.  However, we can also see how the index has stalled at the 1470 level and this is the crucial point that will have to be cleared for this rally to continue.  If or when that happens, we can expect the resumption of the recent rally.  Fundamental headwinds remain, of course, in the form of the debt ceiling debate and Fiscal Cliff Part 2, but the bias seems to favor the bulls at the present time.

The Week Ahead For Stocks and ETFs

This week brings a blizzard of earnings and economic reports.

Significant earnings reports will come from the likes of JP Morgan Chase (NYSE:JPM) General Electric (NYSE:GE) and Intel (NASDAQ:INTC). They will be joined by Bank Of America (NYSE:BAC), Citigroup (NYSE:C), American Express (NYSE:AXP), Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) in the closely-watched financial sector.

The week will also mark the beginning of the new tax programs enacted in the 11th-hour fiscal cliff deal as the tax increases start appearing in workers’ paychecks.  The Social Security tax holiday is now over, which could reduce overall household income by more than $120 billion in 2013.  Overall, the current changes are expected to trim %1-1.5% from GDP. That and the upcoming spending cuts are likely to add to the drag on the already sluggish U.S. economy.

Economic reports also include retail sales and Empire State Index on Tuesday, industrial production and homebuilders on Wednesday, weekly jobless claims, Philadelphia Fed and housing starts on Thursday, with University of Michigan consumer sentiment rounding out the week on Friday.

VIX and VIX ETFs continued their recent decline ahead of earnings season and the upcoming spending cuts and budget ceiling debate.

Along with the debate over raising the debt ceiling, upcoming weeks could be extremely volatile.  However, for today, complacency rules as VIX and VIX ETFs bump along the bottom of a multi-year range. VIX and VIX ETFs tend to move opposite to equity prices and so a low VIX oftentimes means that rising volatility and declining equity prices lie ahead.  Most intense action is likely to occur in February and March as the debt ceiling and second fiscal cliff deadline approach.

Recommendations:

For the week of January 13, 2013, Wall Street Sector Selector will SELL Velocity Shares Short Term VIX ETN (NYSE:VIIX)

We also SELL iShares 20+ Year Treasury Bond Fund (NYSE:TLT)

Wall Street Sector Selector remains in “yellow flag” mode, expecting a possible trend change if current resistance levels are broken.

See my previous articles to follow my VIX ETN trading strategy:

Disclaimer: VIX ETNs are extremely volatile and can easily sustain large gains or losses. Risk management and position size are extremely important. Read the prospectus to understand the potential risks and rewards. It is possible to lose your entire investment. The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector’s Disclaimer, Terms of Service, and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.


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