The S&P finally made a new closing high after three weeks of trying but another index just made a two-year low.

That other index is the Volatility Index or $VIX. The VIX closed at 11.39 on Friday and the lowest close since July 2014. The low before that was January 2007. There is an oil saying in the market, "When the VIX is low, it is time to go. When the VIX is high, it is time to buy." That has always worked in the past, especially when it is high. When the VIX is in the 12-15 range it can remain there for months at a time. That is normally the sweet spot where the market has just enough volatility to keep it interesting but not enough to scare the novice investors out of the market. Over 15 and we start getting some volatility swings in the S&P and over 20 people start running for the exits. They should be running for the exits today with the VIX near 11.

It has only dipped that low for more than a day or two, twice in the last ten years. We did see an intraday drop to 10.88 on August 8th, 2015 one day before we began a spike that would hit 53 on 8/24. Before that there was an intraday dip to 11.52 on September 19th, 2014 and the next day a spike began to 31 on October 15th. When the VIX becomes abnormally low, it is a serious warning signal.

One of my favorite trades is selling calls on the VIX when it spikes over 20. The hang time is normally limited to a few days and it ALWAYS returns to the low teens eventually.

The chip sector has been a major contributor to the rally in the Nasdaq. The Semiconductor Index closed at a new weekly high but the daily high close is still a point higher at 774.93. With the chips in breakout mode, they will continue to power the Nasdaq as long as their rally lasts.

The Nasdaq/SOX comparison chart shows the relationship between chips and the tech index. Right now, they are both setting new highs.

The other Nasdaq contributor is the biotech sector. The $BTK has broken out above strong resistance at 3,250 and could be headed for 3,850. Analysts believe the bad news is already priced in and the political candidates are too busy throwing mud at each other that they have forgotten about drug prices. Even if they do remember their pledge, it will be at least a year before any bill could even begin the arduous task through the House and Senate.

The Dow Transports ($TRAN) have been an anchor for the Dow. The airlines are suffering from excess capacity, increased competition, terror fears in Europe and Zika fears in the Americas. Oil prices back at $40 weakened expectations for railroads on worries they will continue o ship less oil, pipes and frac sand. When prices rebound back over $50 the railroads will recover but that could be months into the future.

The Oil/Dollar chart continues to show the impact of the strong dollar on oil prices. With U.S. economics improving and other central banks easing, the dollar should continue to rise and continue to put pressure on oil prices.

The percentage of S&P stocks over their 200-day average has rebounded to 78.8% and very close to the peak set in 2014. While it is possible for the percentage to rise over 80% it already represents very overbought conditions.

The percentage of stocks on the Nasdaq over their 200-day average has risen to 62.36%. Because the Nasdaq is a broader index than the S&P it is harder to move the percentages much higher. There was a peak at 70% in 2013 but anything over 65% is very rare. This is another indication the market is overbought.

The comparison chart between the high yield ETF and the S&P show the charts of each peaking at a new high with the HYG leading the S&P higher. The correlation is just over 75% as of Friday.

Last week I pointed out that all the broadest of the major market indexes were poised to break out to new highs. That happened and they show no indications of retreat. Normally they will not show indications until disaster strikes.

I would remain long until we are forced out of our long trades by tight stops. The markets can and do move up strongly in August because everyone was expecting the opposite direction. We clearly saw that on Friday. However, volume is going to decline dramatically over the next three weeks as summer winds down. Low volume means a lack of conviction and directions can become volatile. Be prepared and try not to buy the first dip.

Enter passively and exit aggressively!

Jim Brown

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