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Discussions With Steve Shobin: The Market, Trends and the VXO

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Is the VXO the chicken or the egg?

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The following appeared on the Buzz & Banter earlier and is reprinted here for the benefit of the Minyanville community.


Minyan Steve Shobin--the nicest man on Wall Street and formerly the #1 ranked Institutional Investor technical analyst--just hopped into the 'Ville for a chat and chew. We decided to share some fare with ye Minyan faithful...

Toddo: So Stevo, wha't your two-cent take?

Shobin: The rally which began in August is still intact. The things I'm looking for to suggest a top would be a sharp decline in junk bond indices, breadth divergence, market leadership failure and my personal account stops working!

Toddo: What junk bond index are you watching?

Shobin: HYT, which is the Blackrock Hi-Yield Index, among others. This is not to say the market is without blemish. When prosperity is the sole domain of one group (in this case China), one has to be a little concerned. I think we're probably in for a few weeks of set-back but overall, the picture is bullish.

Toddo: Didn't see a "top" in breadth divergence earlier this year?

Shobin: Yes, we did. I look at breadth trends within trading cycles that begin when the market gets oversold. So far, in this cycle, we have not seen a significant breadth divergence.

Toddo: OK, so market leadership, in your eyes, is energy, basic materials and China plays. But what about the financials. You're old school and I know you're aware of the inter-dependency in the context of a finance-based economy. Citigroup (C) is at 52-week lows, Washington Mutual (WM), Countrywide (CFC)...I can go on and on. Doesn't the action in this sector worry you if, for no other reason, that it's the highest weighting in the S&P?

Shobin: It won't be the highest-weighting for long!

Toddo: So you think the rotation is healthy as opposed to a precursor of something more foreboding?

Shobin: There is no way of white-washing the demise of the financials. It is a negative. But just like a football team, a stock market team has a lot of players that it can count on.

Toddo: And a lot of cheerleaders! Any final vibes before we break for our Chinese Chicken Salad?

Shobin: Yes, a new recovery high in the VXO say, above 21.50, would signal to me that more caution is warranted.

Toddo: Great, one last question that I've always wanted to know. Is the VXO the chicken or the egg? In other words, we know that volatility is the opposite of liquidity. So, my question is, would a jump in the VXO be reactive (to lower prices) or proactive in terms of a leading indicator?

Shobin: The VXO to me is a sign of confidence or skepticism. When it rises above key levels, it suggests that confidence of the market is waning. I wouldn't make anything more out of it than that. I'm no so concerned with the DNA of the indicator as much as its body language.

Toddo: Thanks Stevo--you're the man. We'll see you at Festivus on December 7th--now let's grab some chow!

R.P.

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