The bulls have been in control of the market since mid-October. After the selloff from mid-September, the S&P moved higher for seven weeks in a row. Oil was falling giving consumers more expendable income, China cut their interest rates and everything was glorious on Wall Street as the calendar rolled over to December—one of the strongest months for stock performance historically.
But not everything goes according to plan. Last week saw the S&P lose 3.52% which is the worst weekly performance for the index since the week of May 14, 2o12.
The CBOE Volatility Index (VIX) had jumped to its highest level in almost three years back in October, but dropped right back down over the next seven weeks. From the high in October to the low two weeks ago, the VIX dropped 63.9%. Then last week the VIX jumped 78.34% and that is the second largest weekly jump in the history of the VIX which dates back to its creation in 1990.
Looking at the chart for the S&P from last week, we see that the index closed the week just above its 13-week moving average and right on the lower rail of the trend channel that has prevailed for most of the past two years. We also see that the 10-week RSI moved completely out of overbought territory, but the weekly slow stochastic readings remained in overbought territory.
Should the market continue to slide, I would recommend keeping an eye on the 52-week moving average as it could provide support. The index dipped below the moving average in October, but rallied back to close the week right on the trendline.
Investors have not dealt with this kind of volatility in December since 2008. That tumultuous month came toward the tail-end of the bear market that started in the fourth quarter of 2007, not during a historic bullish run for the market. Will investors treat this volatility differently or will they buy the dip as they have done in most cases for the last five years?
Looking at the chart of the VIX, the indicator went almost two years without moving above 22.50. Now the indicator has moved above that level in three separate weeks within the past few months. The VIX went through a similar period from 2005 through the first half of 2007, with the indicator only moving above 22.50 in one week. In the second half of 2007, the VIX spent more time above the 22.50 level than it did below that mark.
The VIX will be worth monitoring over the next few months to see whether it remains elevated from the levels seen over the last two years. If it does, it could mean that the market is headed for another bearish period. In 2007, it was the US debt market that set the ball rolling for the bear market. This time around it looks as if economic slowdowns all over the world could be the culprit. Russia is close to moving into a recession and Japan is already there. China is growing much, much slower than they were for the first decade of this century and their central bank recently took action to try to keep them from entering a recession.
The other day, CNBC personality Jim Cramer said he sees the rest of the world entering a recession, but not the United States. As I wrote last week, I don’t think that is possible. If the rest of the world enters a recessionary period, the U.S. will too.
