Is the market due for a correction in the very short term?

RSI and the Volatility Index may give traders a clue

Since the beginning of 2012 the S&P 500 has soared 7.5%. Based on the performance over the last couple of years investors would be thrilled with that return for a whole year, let alone six weeks. However, many trading professionals are treading lightly in terms of short term positioning. Since the last leg up the S&P futures have traded in a 13 point range, never above 1353 nor below 1340.

Could this be an indication of a move in one direction or another?

Brian Hunt wrote an article “A Major Concern for Traders Right Now” warning of a potential downside move indicated by a movement of the RSI. The article displays the past 12 months of trading in the benchmark S&P 500. Note the extra “pane” at the bottom. This pane shows the market’s “RSI”… an indicator that measures an asset’s “overbought” or “oversold” status.

“An RSI [Relative Strength Index] reading over than 70 means a market is overbought and due for a correction. An RSI reading under 30 means a market is oversold and due for a natural rebound. In other words, a market with a high RSI reading is a rubber band stretched to the upside and ready to snap lower… a market with a low RSI reading is ready to snap higher.

As you can see, the stock market’s RSI reading is as high as it has been in almost a year. Each time stocks have gotten to this “overbought” level, they’ve suffered sharp short-term selloffs.”

Another factor to consider is what has been happening with the Volatility Index (VIX) being at a near 13 month low. The VIX trades on the fear of the S&P based on option premiums and generally works inverse to the market. In Jeff Clark’s article “Bulls Beware: This Is the First Sign of a Correction” he shows why the VIX just fell out of a falling wedge pattern it has been in since October and why he also believes a correction is coming.

Of course if you are a long term investor holding growth stocks a correction might be of little concern over the long run. However if you are looking at getting in for the long term, you might want to let the price of your watched asset drop in the event of a market correction. Traders on the other hand, might want to beware.

Let us know what you think. Do you think a market correction is right around the corner? Or do we have one leg higher, setting up a correction at the start of the second quarter? Does a dip in the market not phase you one bit?

Read more from Brian Hunt: A Major Concern for Traders Right Now and from Jeff Clark: Bulls Beware: This Is the First Sign of a Correction

Email us at  iinvest@chesapeakeinvestment.com.

“Always invest your time before you invest your money”

Chesapeake Investment Services
Managed Futures Specialists

Is it time to buy Gold again?

When the price of Gold fell 21% from the all time intra-day high price of $1,925 back in September 2011, naysayers quickly sold off their positions thinking the drop would continue rapidly through 2012 effectively ending the Golden Bull Market.

There are many factors indicating otherwise according to Frank Holmes’s article from usfunds.com. After Ben Bernanke reaffirmed that the Fed would keep interest rates “exceptionally low” for the next two years, Gold has risen over 4%. China and Brazil have also recently lowered rates as many nations around the world are looking for a boost in their respective economies.

The surplus of money supply combined with low real rates brings to light the “fear-trade” of Gold.

Past performance is not necessarily indicative of future results. The risk of loss exists in futures trading.

Then there is the “love-trade” of Gold brought on by the Far East nations of China and India. In 2010, the Indian Sub Continent and East Asia made up nearly 60% of the world’s gold demand and 66% of the world’s gold jewelry demand, according to the WGC. Indian jewelry demand has historically increased during the Shradh period of the Hindu calendar, but last year, high prices and a volatile Indian Rupee currency kept many Indian buyers on the sideline.

Past performance is not necessarily indicative of future results. The risk of loss exists in futures trading.

We anticipated that the Year of the Dragon would spur an increase in the buying of traditional gifts of gold dragon pendants and coins. Gold buying did hit new records, says Mineweb, with sales of precious metals jumping nearly 50% from the same time last year, according to the Beijing Municipal Commission of Commerce.

Frank Holmes states: “This should serve as a warning to all of gold’s naysayers. Gold bullfighters beware—you now have to fight the gold bull while fending off a golden Chinese dragon.”

The Gold Bull market has created many opportunities and pit falls for investors and traders over the last few years.

Read more from Frank Holmes:  In the Bullring With Gold

Let us know what you think about Gold in 2012. Are you buying? Email us at  iinvest@chesapeakeinvestment.com.

“Always invest your time before you invest your money”

Chesapeake Investment Services
Managed Futures Specialists

Social media IPOs: gold mine or new bubble?

Social media stocks are hot on the eve of Facebook’s historic initial public offering, but there are a lot of questions surrounding this new industry.

Eric Jackson’s article from thestreet.com gives 5 reasons why social media stocks are bound to fail:

1. They will become much more liquid in 2012 as their lock-ups end. (“No matter what, there starts to appear a lot more of the company’s equity on the market starting six months or so after an IPO. When this occurs, the stock price typically gets pulled back to earth.”)

2. They will sell a lot more of their stock to get as much cash as they can. (“More important than the insider VCs and CEOs being able to sell their shares is the fact that most of these companies will want to sell a great deal of additional equity to the market this year in order to beef up their cash reserves.”)

3. Their growth rate will be slower than expected. (“At this point in the life cycle of all these young companies, hope springs eternal. The future is endless possibility. There have been — at least for most of these companies — few if any real disappointments… yet.”)

4. When you need to raise cash, why would you hang on to these stocks? (“When the panic comes, the playbook will be to dump high-flying stocks like these ones to protect yourself.

5. The roadmap for these stocks is Youku (YOKU_). (“The Chinese online video site Youku is a good role model for what will likely happen to most of these social media stocks.”)

We believe there are a few simple questions investors should ask themselves before jumping in to these new IPO’s:

How do these companies make money?

• How do they plan on producing and sustaining growth?
• What factors are relevant in the valuation of a social media company?
• Are these stocks the next equities bubble?

We will be monitoring these companies closely throughout the year. Send us an email and let us know what you think about Facebook, Groupon(GRPN), LinkedIn(LNKD)Pandora(P), Zillow(Z), Zynga(ZNGA), Angie’s List(ANGI) or any other hot social media websites.

Read more from Eric Jackson: In the Year of Facebook, Beware the Social Media Stocks

“Always invest your time before you invest your money”

Chesapeake Investment Services
Managed Futures Specialists