With the market getting ready to cap out, an impending market correction and unrest in the middle-east many traders have had their eye on the VIX to get some sign of what's going to happen next. Today, the VIX spiked and as you can see the markets are all in some relative form of disarray.

Some stocks to look at:
SU
USO
F
BKS

Some Links on Volatility:
Volatility (finance)
Volatility Trading Digest - VIX Hedging
Another Sign the Market Is Headed Up

I posted Tuesday about the upcoming market correction for 2011. Typically these corrections are said to begin in May. I gave some evidence that it could begin as early as this month. Last year, the first signals of the Spring correction came toward the end of April with confirmation into May. After posting this, I got several hits that were from first page Google search results about a 2011 market correction. This being said, I wanted to add some commentary and information as all of this develops.

First point I need to make is that while we have seen a fair amount of evidence to believe that a market correction is on the horizon, we have yet to see any confirmation play out. As a trader, this makes me wary of the markets' current strongly bullish postures and their longevity, but I'm not exactly running for the short hills as of yet. The Dow Industrial Average declined slightly on two consecutive days (Monday and Tuesday) on slightly below average volume. This appeared to be a weak reversal signal especially combined with the bearish reversal clusters formed in several time periods on all three major indexes. But given the strength of the bullish posture of the Dow, I want to be careful not to jump the gun on the reversal either. Else I'll lose money that I'll have to make up once the trend does reverse.

If you look at the candlestick for 2/16/11, you will note that the body of this candlestick engulfs the bodies of the previous two down days. This does the opposite of confirm the reversal signal. It negates it. Furthermore, it did so on more volume than the previous two days. The volume change was less than remarkable, but it further weakens the previous reversal signals.

Sell in May and go away? An old Wall Street adage use to run as such. Last year I predicted in April that a market correction was soon coming. This doesn't make me a prophet, but I wanted to note this trend again. My prediction was based on a large number of factors. Looking at the major markets last April, there was a bearish cluster formation in the DOW. On February 11th, 2011 (last Friday) there was another such cluster. This time in all three major indices. This information came from daily periodic data. Looking at weekly periodic data, we can also see a bearish cluster formation on the week of February 7th (last week) in all three major indices.

Looking at the DOW yesterday and today, there appear to be reversal signals. Confirmation could be provided later this week, even as soon as tomorrow. Furthermore, looking at the weekly periodic data forming this week, a bearish reversal signal would add strength to any confirmation present in daily periodic data in the coming days.

Based on this information, there are a few things that would not surprise me in the least.

1) The stock market pulls back this week, ending it's first leg correction below a DOW mark of 11,444 likely around 11,270.

2) The first leg signals an annual market correction beginning in February, rather than May. (The DOW should not end up below 11,000)

3) This entirety of the correction (all three legs) continues at least into April, but likely into June.

Note that this may just be a hiccup in the market and coincidence in the data. Look for strong confirmation signals and do thorough data analysis before making trading decisions. I'm personally, going to look at everything carefully before making any decisions and I try to never underestimate the irrationality of group psychology. Millions of investors could just decide to keep on buying in blatant disregard of what makes sense until May simply because they like the old saying.

Link: http://skitcherz.com/blog//blog6.php/2011/01/06/europe-hates-our-economy-stock-prices

I've just read that my hypothetical scenario about the Fed behaving like a business is unlikely in the opinion of forex analysts. Valuation of the dollar is also due to a perceived increase in the strength of our own economy. Since that is what the Fed actually makes decisions on (unlike demand for dollars as in my hypothetical), the Fed will likely NOT feel the need to print more money even if Euro holders keep buying dollars. In fact, that would mean at that point that long dollar positions would probably fair pretty well.

Links:
Euro Tumbles On US Economic Recovery, Euro-Zone Troubles
Dollar Rallies Beyond $1.30 Against Euro for First Time in Month
Dollar rises to two-week high after jobless claims
Euro Sinks Against Dollar Amid US Economic Optimism

I just find this to be too funny. Despite the US printing more money without substantial increase in goods or services, our dollar keeps rising in value relative to other currencies. Specifically relative to the Euro. The share price of UUP which is an ETF that trades with the value of the US dollar as compared to various foreign currencies has been rising. In fact, as of the writing of this post, the value has risen 1.08 points or 4.8% approximately since 10/14. While other currencies devalue in relation to our own, people want to buy our currency with theirs. This creates and increase in scarcity of our own currency, driving up the value. To many this often sounds great. But what that means for the market and for economic growth is usually a slow down. The market indicators tends to slow their climbs, or completely reverse them and decline. There is less money available to people, so less money is spent. This slows down an economy. Despite the best efforts of the powers that be, we just can't seem to inflate our own currency.

The other problem with this is something that I have discussed in several past posts. If the value of the dollar climbs, stock prices tend to drop. That's why the market indicators drop as I said above.

Because of economic issues in Europe (that I have been to lazy to really follow) the Euro has been having issues. This is what has been translating to the US dollar not being able to inflate. So I jokingly say that EU is killing their own currency just to spite us.

As I was writing this, a thought occurred to me. The US Dollar market right now seems similar to the housing market where I lived. Back in about 2005 real estate values had just about completed a run up that was one of the highest in the nation. Prices were so high that I read a figure claiming that median value of single-family homes was about twice that for which a median income earner to get approval. What happened all across the nation soon after? To quote the buzz phrase at the time, "the bubble burst." I'm wondering if something similar could happen to our dollar values here. We keep printing more money. But people keep buying it up like it's going out of style (or like rats jumping of the Euro ship). Is this creating artificially high dollar values? Imagine the US dollar was a product that was produced my some business called the Federal Reserve. Normally when demand increases, businesses increase supply to meet the demand. In fact, the fed already tried this once right before more bad news started coming out of Europe. So if the US keeps printing money every time the Euro holders buy US dollars, we will continue to see more and more dollars in circulation. This devalues (or inflates) our currency. But contrary to this effect, Euro holders keep buying those new dollars. This drives the price up even though the value is less. What you end up with is a bunch of people with dollars that cost way more than they were worth. It's like a pyramid scheme or the housing situation. Back in the early 2000's people owned houses that cost more than they were worth by a LOT. This is a big reason for the housing market collapse. So if this happens with the dollar, we could look at a huge and sudden devaluation of our own national currency.

Is that going to mean ruins for the US? Many people think so. But they clearly don't understand how currency value effects economy. What would definitely happen is oil prices would drop. I can't think of many Americans that would complain about that. What would almost definitely happen (if their wasn't a huge scare) is that the stock market would suddenly blow up. But there would also be a fairly large correction as well. It isn't guaranteed to all happen this way. But it wouldn't surprise me and it's an interesting thought.