Expect Volatility This Fall

Includes: CRUD, GLD, IWM, SPY, XLY
by: George Simone

Rallying strongly in May, then a steep nosedive in June, only to rally to record highs in July and after all that it's down to the bottom of the pit in August. That kind of extreme volatility has some prominent market watchers proclaiming that the sky is falling on Wall Street, ushering in a new and prolonged bear market. Really?

Sure, volatility this fall is likely to increase, with September usually being a poor month for the market anyway. On top of that comes the question about when the Fed will taper its easy money QE programs and when, or even if, the U.S. military will strike against Syria, all of which is fraying investors' psyche.

All of this is also enough reason to stay in cash and watch the market unfold from the sidelines, until there is some clarity from the Fed and the U.S. government. Adding to the uncertainty is that this market has no trend momentum to either the up or down-side, only air pockets to whipsaw in and out of.

In this kind of market environment it is no wonder that August saw the biggest cash withdrawals in more than three years for U.S. traded ETF funds, with equity and bond funds not far behind.

Since last June, Wall Street has been outpacing corporate profits at the fastest pace since 1999 when the dot-com bubble burst. This shows that investor's enthusiasm was getting way ahead of corporate and economic performances.

This divergence does not appear to be sustainable. So both corporate and economic performance has to catch up, or investors' enthusiasm has to come down.

Well, the sharp shake-outs in August suggest that investors have thrown in their towels and some sort of equilibrium with economic reality has been established, in that now both are the pits.

Yet, among all that turmoil, confidence among U.S. consumers increased unexpectedly in August, as they keep growing more optimistic about the economy. Sustained jobs growth, higher home values and fattened stock portfolios in recent months are on track to have consumers give business conditions a boost.

Check the SPX, SPXL and SPXS Troika charts and note that the [SPX] among other indexes blew a bubble between July 22 and the end of August.

A bubble is formed when the 20 day red moving average line shoots strongly above the 50 day green moving average line.

The same configuration appeared last May, and in both instances the market took a nosedive as these bubbles deflated, but did not burst - big difference!

Now, just as it did last May, the market is in position to find traction again and resume its rally. When its MACD momentum index and RSI strength indicator have moved back up into their respective bullish territories again, that's when the market will be in gear to the upside.

Also note that the MA lines configuration is still bullish [green line below the red] which indicates that the market is also still bullish.

Check the [SPXL] bull-leg of this Troika and note that its MA lines configuration also remained bullish, albeit not by much. Once its MACD momentum index and the RSI strength indicator move back up into their respective positive territories, the bulls will be in position for a good run to the upside.

The SPXS bear-leg of the Troika gives a good demonstration of what the effect of an inverse bubble looks like. When the 20 day moving average line [red] slips too far below the 50 day moving average line [green] a selloff has been overdone and a snap-back rally is just around the corner.

But a word of caution. MA lines that form a bubble are a very subjective matter in that one chartist's bubble is another chartist's flat line. Also note that when watching out for bubbles, bullish or bearish, the MACD momentum index is a good place to start.

OK, so the bear had a pretty stiff rally out of the hole at the bottom of a deep pit. With the bear-bubble deflating and with the MA lines of this bear still in a negative configuration, expect the bulls to snort anytime soon.

The bottom line is that this Troika is bullish, and so is the market.

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Another sign that the "bear market" prognosticators have it all wrong is that this X vs. X index keeps hugging the bottom of a deep pit. The further down while being pressured by a bearish MA line configuration [green line above the red] the more strongly the market remains poised to the upside.

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The following two charts show that the market is suffering from a split personality, and that is the main reason for the heightened volatility in this game.

The [200 R] index shows that stocks are falling off their 200 day support line in droves, and that surely is bearish.

Meanwhile the small-caps IWM index has been moving steadily from the bottom left of its chart to the upper right ever since last year's March. During that time this index has been strongly supported by its bullish MA lines configuration [green line below the red] and that is about as bullish as bullish can get.

Keep in mind that "small caps" reflect the guts of the market as well as the economy. So fasten your seat belts, the ride to the upside is going to be breezy.

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Check this NASDAQ chart [COMPQ] and note that its MACD momentum index showed bubbles between May and June, and now again between July and August. Each time this market pulled back and then recovered.

Meanwhile NASDAQ remains well supported by a bullish MA lines configuration, which bodes well for further rallies ahead.

This demonstrates that there is quite a difference between a bubble bursting, which would signal the onset of a bear market, or just deflating by letting some hot air escape, which would be aiding a bull market. The later was the case in recent months, and that's why the market remains poised to the upside.

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This commodity index [GTX] shot up too fast too soon and has lost its traction on a slippery slope. But remaining well supported by a bullish MA lines configuration, all it takes is some consolidating and commodities generally will be set to rally some more.

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A much needed pullback put [GOLD] in a consolidation mode. That is bullish for the yellow metal, especially while still well supported by a strongly bullish MA lines configuration [green line below the red.]

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Oil [WTIC] appears to be consolidating at the upper end of its price range. Well supported by its bullish MA lines configuration, the bias of oil remains to the upside.

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For now, it is still best to stay in cash and just watch the market unfold in the days ahead. But in case momentum should develop to your advantage, here are some favoured ETFs to take advantage of.

Keep in mind that leveraged ETFs are for the joy of trading, while non-leveraged ETFs are for investing. For that purpose and for as long as this bull market stays intact, only LONG ETFs should be considered.

Leveraged long ETFs:

Biotech 2x (NASDAQ:BIB), Health Care 3x (NYSEARCA:CURE), China 3x (NYSEARCA:YINN), Russell 2000 3x (NYSEARCA:URTY),

Small Caps 3x (NYSEARCA:TNA), Mid Caps 3x (NYSEARCA:MIDU), Financials 3x (NYSEARCA:FAS), Oil 2x (NYSEARCA:UCO),

Mid Caps 4000, (NYSEARCA:UMDD), NASDAQ 100, 3x (NASDAQ:TQQQ), Russell 2000, 2x (NYSEARCA:UWM),

S&P 500, 3x (NYSEARCA:UPRO), S&P 500, 3x (NYSEARCA:SPXL), Semis 3x (NYSEARCA:SOXL), Financials 3x (NYSEARCA:UYG),

Energy 3x (NYSEARCA:ERX), DOW 30, 3X (NYSEARCA:UDOW), Technology 3x (NYSEARCA:TECL), Technology 2x (NYSEARCA:ROM),

Basic Materials 2x (NYSEARCA:UYM), Gold 2x (NYSEARCA:UGL), Gold 3x (NASDAQ:UGLD), Gold Miners 2x (NYSEARCA:NUGT),


Non Leveraged Long ETFs:

Biotech (NYSEARCA:BBH), Internet (NASDAQ:PNQI), Health Care (PXCH), Pharma (NYSE:PJP), Leisure (NYSE:PEJ),

Banks (NYSEARCA:KBE), S&P 500 (NYSE:RPV), Financials (NYSEARCA:IYG), Capital Markets (NYSEARCA:KCE), Gold (NYSE:DGL),


Leveraged Short ETFs:

Nat Gas 3x (NYSEARCA:DGAZ), Gold 3x (NASDAQ:DGLD), Developed Markets 3x (NYSEARCA:DPK), Real Estate 3x (NYSEARCA:DRV)

Silver 3x (NASDAQ:DSLV), Crude Oil 2x (NYSEARCA:DTO), DOW 30, 2x (NYSE:DXD), Emerging Markets 3x (NYSEARCA:EDZ),

Financials 3x (NYSEARCA:FAZ), Mid Caps 3x (NYSEARCA:MIDZ), NASDAQ 100, 2x (QID), DOW 30, 3x (NYSEARCA:SDOW),

Mid Caps 400, 3x (NYSEARCA:SMDD), Basic Materials 2x (SMN), Semis 3x (NYSEARCA:SOXS), S&P 500 3x (NYSEARCA:SPXS)

Russell 2000, 3x (NYSEARCA:SRTY), Semis, 3x .

Non Leveraged Short ETFs:

Gold (NYSEARCA:DGZ), Emerging Markets (NYSEARCA:EUM), Real Estate (NYSEARCA:REK), DOW 30 (NYSE:DOG), Oil (NYSEARCA:DNO),

NASDAQ 1000 (NYSEARCA:PSQ), Russell 2000, (NYSEARCA:RWM), Equity Bear (NYSEARCA:HDGE), Mid Cap 400 (NYSE:MYY),

Financials (SEF), S&P 500 (NYSEARCA:SH), Russell 2000 (NYSEARCA:TWM).


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.