With respect to the old Christmas folklore story, ‘Yes Virginia, there is Volatility‘. The massive move this past Friday was not telegraphed, but then the first big move down hardly ever is. Nobody rings a bell at the top, nor at the bottom. Navigating the markets without the proper instruments becomes a very dicey proposition, and certainly with the right tools there is no guarantee of success, certainly with the timing.
For instance, the overbought sentiment has been frothy for several weeks, as those ‘expecting’ a big selloff to occur were denied over and over again. We heard in late July that August would be ripe for such a rip, yet that never materialized. Yet, the move lower on Friday wiped out gains earned over two months — in just one session! The SPX 500 has not been this low since the early days of July, when markets were just recovering from a devastating fall post-Brexit.
The VIX rose sharply Friday, rising an unimpeded 38% to put it well over 17%, the highest level in months. Certainly the complacency of low volatility was like a sleeper pill, yet players woke up today and found the markets on the defensive all day long. The CNN Fear/greed index, solidly in ‘greed mode’ for months has now retreated to a ‘fear’ reading, the lowest since July. Further, breadth was as bad as we’ve seen it, the McClellan oscillators succumbed to the pressure and fell sharply into nearly oversold (washout) territory.
What happened that made this day so bad we had hardly any buyers step up? That is a change in character from recent market action, and quite disturbing as bonds were not even a safe haven. The dollar was strong, gold was down, no place to hide. This week is a wildcard, yet possibly points to downside due to the options expiration coming up on Friday.
So, we can certainly point to any reason we wish – Fed squawk about potential rate hikes coming (frankly, this is gibberish as the Fed is clearly trying to talk markets down as they did in May), or was it some dangerous behavior from N Korea, which we saw negatively effect markets in January. Perhaps it was the lack of more punch by the Euro Central Bank. Any reason is good enough to call a selloff, as we know there are million reasons to sell but only one reason to buy. We can come up with a host of nefarious reasons or excuses, but we must react careful and focus on the action without bias. It was nasty, plain and simple.
What does the future hold? Naturally, we’re not market timers or guessers, rather we’ll just pay attention to what we see happening in front of us. Believe me, holding bullish positions through a rout like Friday hurt more than skinned knee, but as we understand the magnitude and look for clues to the next move, we’ll be far better prepared and ready for the next run — up or down.