Market opinion

The market may have topped or is very close to a top for the following reasons / facts:

• AAII/Retail investors' bullish sentiment is at highest level since Jan 2007
• Spread between QQQQ or Nasdaq 100 and VXN is at highest levels in 4 years
• DJIA and S&P 500 has almost reached the price target of reverse head & shoulder formed during summer correction, while NASDAQ has already reached the price target
• High yield funds are turning negative significantly on Friday for the first time in about 4 months.  Junk bonds and high yield bonds have broke down the up trend from mid-May to early November.
• Bond fund (Pimco Total Return Fund) is breaking down the 20 month up trend since March 2009 (not quite sure what's the implication of this to equity market)
• Euro/Yen is at turned down at upper end of downward channel at around 1.15 and is now heading down (see chart below)

I would put extra focus on currencies in the next week.  On my radar screen: QID, QLD puts, VXX calls, BIDU puts

Leverage Short ETF 1 year relative performance

Comparing QID, SDS, VXX and FAZ 1 year relative performance in % terms: obviously VXX is the worst performer, SDS is the best, FAZ has been performing worse than QID, but recently, FAZ started to out-perform QID.

Protective ETF chart analysis: VXX and QID

VXX

QID

Both ETFs have bottomed and booked higher low in early August comparing with the low in late April.   Together with the huge volume associated with the advance from April low, these evidences indicate the long term down trend since March 2009 for these two ETFs has reversed.

Bull Market Correction or Start of Bear Market?

Most of time, market participants (hedge funds, prop desks) like to hide their hands as they don't like followers in the early stage of a market turning point.  S&P rebounded from Tuesday low and closed fractionally above 200EMA on Thursday, but failed to close above 200EMA on Friday.  The key question now remains: are we at a bull market correction or start of bear market?  I'd like to use VIX, one of my favorite leading indicators and my favorite PPO divergence analysis tool to dissect early signs of future market direction

As you can see in the chart (click to enlarge), VIX dropped this week to a level that's higher than the level in the week when "European TARP" was announced, however, the PPO has dropped to a level lower than that week, this divergence is indicating that fear is subsiding as of now, and it is a slim of evidence that the market is under bulls' control despite the Friday's failed test of 200 EMA.

Euro Index made a new low last week, however comparing with the low it made in mid-May, the PPO is picking up, this divergence is suggesting a trend change is potentially forming.

Similar but contrary to Euro Index, US Dollar ETF (UUP) is showing a divergence between price move and PPO.