Too Much, Too Fast

Rick_PendergraftFrom the peak on September 19 to the trough on October 15 (19 trading days), the S&P lost 9.8%. From the trough to the high on October 31 (13 trading days), the index gained 10.85%. Over the course of 31 trading days, the round-trip covered over 20% for the index and during those 31 days, very little changed.


So what caused the dip? Nothing in particular, at least as far as I am concerned. What caused the rally back? Pretty much the same thing. On October 29, at the last FOMC meeting, the Fed announced the end of QE3 purchases. The market danced around a little and then closed close to unchanged on the day. The next day, the market rallied sharply for the seventh time in ten days.

On October 31, the Bank of Japan announced a significant increase in its bond-buying program and that sort of offset the Fed’s actions. Global stock markets soared after the news and by the end of the day, the S&P had erased the losses from the three and a half weeks and it only took two and half weeks to complete the rebound. It is a classic V-shaped bottom, only it is coming at a time when the market is at all-time highs.

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With the extreme rebound, the sentiment indicators changed dramatically as well. The AAII Sentiment Survey saw the bullish percentage jump from 39% to 49.4% while the bearish percentage fell from 30.5% to 21.1%. With the changes in the bullish and bearish percentages, the ratio of bulls to bears jumped from 1.28 to 2.34. The last time we saw the ratio change so drastically was in the last week of 2013 when the ratio jumped from 1.89 to 2.97.

The CBOE Volatility Index (VIX) had jumped to 31.06 on October 15 and that was the highest reading since November 2011. Since then, the VIX has dropped as low as 13.72. A 55% drop in 16 calendar days is incredible, but it tells you how investors aren’t fearful about big decline in the market.

Personally I think the volatility is going to continue for a while. The mid-term elections, the ending of QE3 and the Asian monetary and economic concerns are all unsettling. Japanese stocks hit a seven-year high on Tuesday after the announcement from the BOJ. While the move by the BOJ is designed to stimulate the economy, investors don’t seem concerned that the central bank sees the need to make such a move.

I am not convinced that we move higher from here on the S&P. I think we see a period of higher volatility and perhaps some sideways movement or a more sustained downturn, not just a few weeks of selling.

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