With all due respect to Francis Pharcellus Church and the New York Sun, “Yes Virginia, there is market volatility.”
After a summer of complacency and low market volatility, the massive move down this past Friday came as a surprise. (Of course, it was not announced ahead of time, but big moves rarely are.) Once again, we were reminded that trading the markets is a dicey proposition, and even with the right tools in our toolbox, there is no guarantee of success (or perfect timing).
Case in point: The sentiment that we were deep in overbought territory had been frothy for several weeks. In late July, the talking heads said that August would be ripe for a big rip, yet one never materialized. All the traders who were expecting a big selloff were denied over and over again.
And then, boom! On Friday, the sellers were out in force and two month’s of market gains were wiped out. The SPX 500 has not been this low since early July, when markets were just recovering from a devastating fall post-Brexit.
Where did the market volatility come from?
The complacency brought on by low volatility was like a sleeping pill. Then traders woke up on Friday and suddenly found the markets on the defensive.
The VIX rose sharply – it was up 38% to well over 17%, the highest level it had reached in months. The CNN Fear/Greed Index, which was solidly in greed mode, retreated to a fear reading. Breadth was really bad all day, and the McClellan oscillators fell sharply into nearly oversold (washout) territory.
So why did so few buyers step up? That is a big and quite disturbing change from recent market action, as bonds were not even a safe haven. The dollar was strong, gold was down, and there was no place to hide. This week is a wild card, though we could see more downside due to the options expiration coming up on Friday.
If you need a reason for Friday’s action, pick one: The Fed talked about potential rate hikes (which is gibberish – the Fed was clearly trying to talk markets down, just like they did in May). North Korea exhibited dangerous behavior again (when they did in January, the markets fell). The European Central Bank displayed a lack of punch.
Honestly, any reason is good enough for a selloff, as there are million reasons to sell but only one reason to buy. But reasons or excuses won’t do us any good. Instead, we must react carefully and focus on the action without bias.
What does the future hold? I’m not a market timer, so I don’t know. I will simply pay attention to what is happening right now and look for clues to the next move. Follow my lead, and you’ll be far better prepared and ready for the next run – up or down.
Copyright: leungchopan / 123RF Stock Photo