The U.S. market has been the world’s super-star over the recent 6-year bull market. It’s been a fun ride, but I see a potential problem with the volatility patterns since 2013. That is, there really hasn’t been any volatility over the last couple of years, and this worries me. The chart below show us the previous levels of volatility coming off of the 2009 bottom – brought on by the hopes and fears surrounding the Fed’s “QE” and “Easing” programs, along with the never-ending saga of European woes. As I’ve noted in prior blogs, we haven’t had a 20% correction since 2011 – nor any type of meaningful double digit correction beyond a few 10%-er’s since 2013.
The VIX chart below demonstrates the lack of volatility- on a grand scheme – since 2012. It’s been hovering around the bottom of its long term range (red line) – a state that tends to change eventually.
I’ve also noticed a change in market breadth on at least one of the indicators I follow. The New high/low chart below shows a divergence between the S&P500 (red line) and the net ratio of new highs vs. new lows on the NYSE (blue line). As you will note on the chart (freestockcharts.com), I’ve circled 2 other times that type of divergence occurred. This divergence in breadth signalled the 2008 crash quite nicely. The divergence in breadth in 2013 was a false signal. However, the angle of decent by the New high/low indicator was not as extreme as it was in 2007. You will note that the current angle of decent on the New high/low indicator is quite sharp – similar to that of 2007.
Finally- note the consolidation pattern on the daily S&P500 chart below. Such triangular consolidations often lead into aggressive moves upon a breakout from the pattern. A meaningful (3-day) breakout through – say, 2120 on the upside may be bullish. A meaningful breakdown through 2080 may be bearish.
I’ve noted the bearish readings on the sentiment indicators I follow in past blogs (dumb money enthusiasm, put/call ratio 1:2, etc), so I won’t go into them on this blog. My “Bearometer” (search my past blogs on this indicator for more info) is also reading low confidence “2” at this point – another leading indicator suggesting caution.
The indicators that I follow are never absolute. We could see a continuation of the low-volatility bull market for the summer. But my bets are against that potential at this juncture. I’m 27% cash at this point, with an eye on bringing that level closer to 40% in the coming weeks.
Tomorrow: Community talk on technical analysis with Keith Richards at Richmond Hill Central Library
1 Atkinson St, Richmond Hill, Ontario this Thursday April 16th 7:00PM
Keith will be speaking on how to “Win by not losing”: Using the power of technical analysis to profit in uncertain markets.
Keith on BNN Market Call next Monday April 20, 2015 at 6:00 PM
Tune in to BNN Monday April 20th to catch me live on BNN’s 6:00 pm call-in show.
You can email questions now to firstname.lastname@example.org – (specify they are for Keith) or you can call in with questions during the show’s live taping between 6:00 and 7:00pm. The toll free number for questions is 1 855 326 6266
I noted in a blog last week that my cycling coach Ed Veal was going to attempt to break the Canadian 1-hour speed record on Friday. I’m pleased to say that Ed nailed it. http://www.canadiancyclist.com/dailynews.php?id=29308