Dr. Kris'  Instablog

What the market taketh away, the market giveth. The recent roar of the bear failed to intimidate the bulls as the major averages managed to rebound off of support levels. The 1600 level provided firm support for the SPX and so did 3400 for the snazzy Mr. Nazzie. Tomorrow, the unemployment numbers will be closely watched and could be a source of volatility, so you bulls should keep your party hats in the closet until then.

Today saw a huge drop in the dollar compared with other currencies. Could this be the start of a bear market in the greenback? A quick look at the currency charts are showing huge topping tails in many foreign currencies (yen, euro, pound, loonie, Aussie $), and a correspondingly huge bottoming tail in the US$--a sign that today's action could be a one-day event. On "risk-on" days such as today, one sees a corresponding drop in treasuries and other bonds but that didn't happen. This divergence could be another sign that today's drop in the dollar is an anomaly. By no means can I call myself knowledgeable in the currency market so I can't tell you why the dollar dropped like it did. (If you do know, please let me in on it.)

All that glitters is not gold!
Not only did most sectors close in the green, so did many commodities. One stand-out today was the break-out seen in some of the platinum etfs. The physically held funds, Sprott Platinum (SPPP, $10) and ETFS Platinum (PPLT, $150) both enjoy the largest daily trading volumes among the four exchange traded vehicles mentioned here with the Sprott trading on nearly twice normal volume today. The other two funds operate as exchange-traded notes based on platinum futures: iPath Platinum (PGM, $34) and E-tracs Platinum (PTM, $17). Unlike gold which has been rising but not nearly to the same degree as its silvery counterpart, platinum looks poised to rally further. Its use in catalytic converters (at least for now) makes for industrial demand and the recent miners strike in South Africa--a significant supplier of the white metal--may be part of the reason behind the its recent rise. If you're chomping at the bit to buy into the precious metal space, platinum is the technically attractive choice. Note that trading volumes on the ETN's are much lower than the physically held issues (so use limit orders) and only the PTM offers options. As always, do your own research before investing!

Subscriber Note: There is one new Stock of the Day.

It wasn't apparent until today how the "Sell in May" scenario was going to play out. The major averages sliced through recent support levels with the market-leading Dow Transports (DTX) making an easy pass through the 620 level. For the bulls to return to power, the next support areas will be critical: SPX 1600, DTX 600, DJIA 14440, Nasdaq 3370, RUT (Russell 2000) 955-960. Note that 1600 corresponds to the 50 day moving average (dma) which has been a source of support for the SPX since the beginning of the year (see chart). A break below this would spell double-trouble for the bulls.

Mirroring today's market move was the volatility index (VIX), but in the opposite direction. Big upward moves in the VIX reflect fears of market instability. How long these fears last depends on what is causing them. If you believe the financial media, the cause of fear is that the Fed may end its quantitative easing policies sooner rather than later. But if that's really the case, then today's worse than expected economic numbers showing a decrease in both private employment and factory orders should have boosted the market rather than prompting a sell-off. What this really means is that investors are either worried about something else that isn't apparent (at least not to me) or that investors are simply taking some money off the table, especially in those areas where valuations have grown rich. If these next critical support levels don't hold, then we'll know that the problem is more likely to be a structural one.

A note on levered VIX funds
During volatile times, many home-gamers turn to gambling on VIX products hoping to cash in on a big increase or decrease in the underlying instrument. (FYI: The VIX is comprised of various near-term options on the SPX.) I just want to take a moment to remind folks that holding some of these derivative products, especially the levered ones, can lead to substantial losses if not monitored closely.

For example, the double levered VIX funds, the UVXY and the TVIX, have done nothing but steadily lose value since their inception dates (12/2010 for TVIX and 10/2011 for UVXY). Since 10/2011, both funds lost nearly 100% of their values (99.7% to be exact) while the VIX fluctuated from a high of 47 to a low of 11. Even during volatile periods, these funds--which are designed to return twice as much as the VIX on any given day--can't even do that. Look at today. The VIX gained over 7.5% while UVXY gained not much more at 8.4%. TVIX actually under-performed the VIX returning less than 7.4%!

The moral of this story is that if you feel you must play any of these VIX products including the unlevered ones, please do so only on a daily basis. Holding them for more than one or even two days can be hazardous to your portfolio's health. (The only one worth holding for any length of time is the XIV, an inverse VIX fund, but I still don't recommend doing it.) If you're looking for portfolio protection during times of rising volatility, buying index puts or put spreads is a much better way to go.

Subscriber Notes: There are two new Channeling Stocks. If you are unfamiliar with this strategy, please refer to the free recipe on the Channeling Stocks page.

If the "Sell in May" scenario kicked in on Friday, it seems it was short-lived. It was looking good for the bears when the worse than expected manufacturing number showing contraction wasn't enough to boost the equity market (because the Fed would likely continue its low interest rate policy to boost the economy). Stocks dropped like rocks after the open but the bulls weren't going down without a fight. A mid-day turnaround lead most of the major averages back up to close in the green. Even the VIX, which spiked over 17 for the first time in a month and a half, retreated to the low 16's. Although the Dow Transports were the only major index to close in the red, it was able to hang onto 620 support. If it can manage to hold onto it then the dreaded "Sell in May" scenario could turn out to be a one day affair after all.

Power Movers: Momentum stocks trading on heavy volume
From time to time I note stocks that are rising quickly on increasing volume. Stocks that are this volatile are the bread and butter of day traders and although most of my readership does not fall into this category, I don't want to anyone to feel left out. Also, stocks that are rising quickly on heavy volume may indicate an exciting new product or business model that is worth considering. Right now, I'm just noting a few and have not done the research to ascertain why they are currently hot. Here are five recent power movers: 1. Alliance Fiber (AFOP, $20.43), up over 50% since 4/24; 2. Biodel (BIOD, $4.80), up 40% since 5/21; 3. Noah Holdings (NOAH, $12.38), up over 60% at one point since 5/7; 4. Sears Hometown (SHOS, $56.65), up 20% since 5/22; and 5.Vermillion (VRML, $3.47), up over 80% since 5/9 (it was up over 110% last Friday but took a hit today). Remember that stocks that have recently enjoyed huge run-ups are prone to sharp sell-offs as Vermillion just proved, so be careful of trying to hold these stocks for any length of time.

Subscriber Notes: There are no new entries but a previous Stock Darling pick is attracting institutional interest. For further info, please visit the Subscriber Services Stock of the Day write-up page (or check your inbox).