Hurry Up and Wait

The US equities market has continued to experience elevated volatility the past few weeks. It is quite rare for volatility to remain as high as it has since early-August for as long as it has. Other similar periods occurred in late-2008 and early-2009, as well as in 1998 during the Russian debt default /Long Term Capital Management debacle. We are therefore not anywhere close to uncharted territory in terms of volatility, though, certainly, such periods are uncommon and therefore poorly understood.

The VIX volatility index topped out this year at 48 on August 8th, a day before the S&P500 made its intraday low of the year. Since then, the VIX has seen successively lower highs, yet remains above its 30-day simple moving average. During the same time, the S&P500 has seen successively higher lows (with the exception of 9.12’s slight breach below 9.6’s low), and remains below its 30-day simple moving average.

The analysis of such moves in the broad equity market and the VIX shows that the market has been coiling for the past few weeks with roller-coaster moves that have left prices net flat since mid-August. Such indecision on the part of the markets often precedes a large directional move one way or the other. Since the long-term and intermediate-term trends are down, according to our work, the likelihood of lower prices must be weighted as the higher probability.

However, as bullish divergences have already occurred in many stocks and foreign stock indices, the likelihood that US equity indices will breach their August 9 lows for any great duration is quite small at this point in time. Should such a breach occur, it may last only minutes or perhaps as long as a few days. On the other hand, should the market close above its August 31 highs in the next few days or weeks, there is a high likelihood of higher prices thereafter.

As for now, the market remains in the thick of a ‘fight zone’, where buyers and sellers duke it out, and nobody wins for more than a few days. Time to hurry up and wait.