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Charts suggest lower volatility, higher stock prices ahead

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The market’s fear gauge is signaling that stocks will see less volatility and higher prices in the next few months, CNBC’s Jim Cramer said Tuesday after consulting with a top volatility chartist.

The fear gauge, also known as the CBOE Volatility Index or the VIX, tracks S&P 500 option prices to measure near-term expectations of volatility, or the chances that the stock market will endure dramatic swings in the near future. When the VIX rises, it tends to mean investors are growing concerned about the market and making bets to protect themselves.

But the VIX has been trading lower since it peaked in December amid a marketwide sell-off, suggesting that fears about the market are subsiding. To make sense of the action after the late-2018 fallout, Cramer asked technician Mark Sebastian, founder of OptionPit.com and resident “Mad Money” VIX expert, for his input.

Sebastian, who also works with Cramer at RealMoney.com, said that while the nature of the VIX has changed, it’s still helpful in predicting what’s next for the market. And, right now, it’s quite positive, he told the “Mad Money” host.

“Sebastian thinks it signals that this earnings season may be a bit of snoozer, with a bullish bias, as the market gradually pushes higher over the next few months,” Cramer said. “The Volatility Index may not be working exactly like it used to, [but that] doesn’t mean it’s useless, and based on the current action here, he thinks the stock market has more room to run.”

To reach this conclusion, Sebastian reviewed how the VIX acted over the course of 2018. Plotting it against the S&P 500, he noted that during the market’s breakdown in February and March, the VIX acted normally: surging when the S&P plunged, and making a lower high when the S&P dropped again, which signaled that the market had bottomed.

But in November, the VIX barely budged when the S&P got crushed, Sebastian said. Normally, that means that stocks are bottoming, but in December, the S&P collapsed again. The VIX only lifted in late December, after the S&P had fallen several hundred points, and didn’t even reach its January peak despite the fact that the entire market was selling off.

“Sebastian says the fourth-quarter decline was different from anything else we’ve seen in the last decade. Since 2008, when the stock market experienced a major sell-off, that’s always been accompanied by a huge spike in the VIX,” Cramer explained. “If you were only looking at the fear gauge, it seemed to be saying that the garden-variety sell-off at the beginning of last year was worse than the total meltdown at the end of last year.”

And, according to Sebastian’s analysis, the trading instruments that Cramer railed against in February — the ones that profit when the VIX does down — were behind the unusual action.

Specifically, securities like the VelocityShares Daily Inverse VIX Short-Term exchange-traded note, or the XIV, which imploded while the VIX stayed calm, “[represent] a sea change in how volatility is going to work going forward,” Cramer said.

“The crazy price action from a year ago left a bad taste in traders’ mouths,” he explained, adding that fewer money managers are likely to hedge their positions using VIX options after seeing 2018’s swings.

“In this new environment, hedge funds will no longer be racing to cover their short positions, which means that the VIX is probably going to signal that there’s less volatility going forward,” Cramer continued.

But that doesn’t mean that the VIX has become a less useful measure, Sebastian argued. The VIX’s tepid action in late December and early January was likely a precursor to the higher prices stocks are currently enjoying, he suggested.

So, as more money managers steer clear of risky VIX trading products and more still unwind their hedges, the fear gauge’s recent breather is signaling a peaceful few months ahead for stocks, Sebastian said.

Cramer’s take? “Even though I’m a little flummoxed that the VIX really didn’t work, I agree with Sebastian. I think we go higher.”

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Stocks

Retail earnings reports, China trade impact

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CNBC’s Jim Cramer on Friday said he expects more of the same in the week ahead of stock trading.

“Next week, once again, is all about trade and retail,” the “Mad Money” host said. “This is the week when most retailers report, so we will be listening closely to what they say about the trade war.”

Monday: Trade watch

The stock market will confront the same issues on Monday as the week prior. The days following will see a lot of retailers hold conference calls, and Cramer is looking to see what they have to say about tariffs on Chinese imports.

“The market will punish companies that source in China and reward companies that don’t, because that’s what [President Donald Trump] is doing,” he said.

Tuesday: Home Depot, TJX, Nordstrom

Home Depot: The home improvement retail giant reports earnings before the bell. Cramer is expecting weather to weigh on earnings again.

“There’s much too much rain this gardening season, and I bet that hurt them,” he said. “I still believe Home Depot can tell a decent story about trade, but it won’t matter if gardening season, their equivalent of Christmas, turns out to be a bit of a bust.”

TJX: The T.J. Maxx parent delivers its quarterly results to shareholders in the morning.

Nordstrom: The luxury department chain has an earnings call at the end of trading. The stock is down more than 20% this year and more than 27% in the past 12 months.

“At these levels, it pays you a 4% yield. I think it may be too cheap to ignore,” Cramer said.

Wednesday: Lowe’s, Target

Lowe’s: Lowe’s, the main rival to Home Depot, presents its quarterly earnings before the market opens. CEO Marvin Ellison is guiding the home rehab chain through a turnaround.

“Wall Street loves Ellison, though,” Cramer said. “If Lowe’s gets hit, either before or after the quarter, I’d be a buyer of the stock.”

Target: Target comes out with its latest results before trading begins. The stock is about $20 per share off its September high and has a 3.6% yield.

“I know it’s battling both Walmart and Amazon, which might be too much competition for any one company, ” Cramer said. “But I think CEO Brian Cornell’s doing a terrific job. You know what, I like the stock here.”

Thursday: Best Buy, Splunk

Best Buy: The tech gadget store reports earnings in the morning. The stock is up 30% this year, and Cramer is warning not to take a chance on it at current levels.

“I’m betting they’re going to have to talk about tariffs on the whole darned conference call,” he said.

Splunk: The software analytics company, one of Cramer’s “Cloud King” stocks, presents its financial report after the market closes. Cramer expects Splunk to put up a good conference call out of CEO Doug Merritt. He said Merritt continues to deliver on promises.

“I like it a lot. … [It’s got] no China exposure — I say buy,” he said.

Friday: Foot Locker

Foot Locker: The shoe retailer will lay out its quarterly report for investors before stocks start trading. With a presence in shopping centers across the country, Foot Locker carries Nike, Adidas, Under Armour and a range of other sports apparel brands in its stores.

“The stock’s been held back by trade war worries,” Cramer said. “I bet it will prove to be immune, or at least more immune than most people think.”

WATCH: Cramer breaks down the week ahead in earnings

Disclosure: Cramer’s charitable trust owns shares of Amazon.com and Home Depot.

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Charts suggest markets could soon get a deep correction

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CNBC’s Jim Cramer said Thursday that his colleague is warning that danger could be on the horizon for the stock market.

The “Mad Money” host took a look at chart analysis as interpreted by technician Carolyn Borogen, Cramer’s coworker at RealMoney.com who also runs FibonnacciQueen.com, to understand what could come of this volatile market.

The major U.S. averages were taken for a ride this week as investors attempted to gauge whether the United States would raise existing tariffs on imports from China on Friday. Because of this uncertainty, the best way to get an empirical reading of the market is through studying chart action, Cramer said.

The high-to-high cycles, as explained by Boroden, in the weekly chart of the S&P 500 is cause for concern, the host said.

Highs on the index have ranged between 31 weeks and 36 weeks, and the most recent peak was recorded last Friday, he said. Prior to that, the last major high was set in September, which preceded the stock sell-off in October.

Markets tend to repeat themselves, and because stocks sold off this week after a big run, Boroden thinks there could be cause for concern.

“In fact, she’s looked at a series of previous high-to-high cycles, and what she’s noticed is that there’s a whole confluence of them coming due this month,” Cramer said. “That’s why she’s throwing up a caution flag, because Boroden thinks we might finally get a deep downside correction — even deeper than what we’ve already experienced during hell week.”

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These 6 stocks could make or break the S&P 500’s run

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Call them the Supersized Six.

Microsoft, Amazon, Apple, Alphabet, Facebook and Berkshire Hathaway — six of the most highly valued companies in the S&P 500 — don’t just boast the index’s biggest market caps.

In fact, those six companies are worth about as much as the bottom 290 companies in the S&P combined. Taken together, their market caps total $4.2 trillion, while the bottom 290 S&P companies are worth roughly $4.3 trillion.

It’s fairly common knowledge that the top 50 S&P stocks are worth more than the bottom 450, and it’s not unusual that the market is frequently this “top-heavy,” says Carter Worth, chief market technician at Cornerstone Macro.

But the concentration in these six names is noteworthy, and it could mean trouble for the market, Worth said Tuesday on CNBC’s “Fast Money.”

Considering the influence they have over the S&P’s direction, it makes you wonder: “Is it an index, or is it a few big names that drive everything?” Worth said. “That’s what makes beating the index so hard.”

He called attention to this chart tracking the six-stock basket against its 150-day moving average, as well as the number of times it has traded above or below that average.

“Literally, every single time we have gotten this far above the 150-day moving average, we have peaked. It is right at that level yet again,” Worth said, pointing to the uptick in the bottom panel’s trend line. “So, as this goes, so goes the market. I think you’ve got a crowding that’s not so good. Just to put it in real context, think of those six names relative to the S&P. It’s all so dependent on these big names.”

Moreover, while the market’s “heavy hitters” have made up 15% of the S&P’s total market cap, on average, since at least the 1990s, that percentage is also ticking up, Worth noted.

“We’re starting to get back to a level that is typically indicative of when markets peak. That’s ’07, so forth and so on,” he said. “None of this is particularly healthy.”

By market cap, Microsoft is worth about $963 billion, Amazon is worth $949 billion, Apple is worth $969 billion, Facebook is worth $540 billion, and Berkshire Hathaway is worth $515 billion.

The broader market mounted a recovery Wednesday, with the S&P lifting off its Tuesday lows early in the session.



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