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Do me a favor and punch up a chart of General Electric (GE). Or 3M (MMM). Or DuPont (DD). Or United Parcel Service (UPS). Or basically any major blue chip, widely held, large capitalization stock.
What do you see over the past few weeks? Nothing. Very little net movement. Extremely tight ranges. Some of the smallest daily candles and bars you will EVER see on a stock chart.
It’s not just your imagination, either. The markets are truly somnolent, even now with the traditional pre-Labor Day quiet period over.
I read one fascinating article earlier this week that concluded the Dow Jones Industrial Average hasn’t traded in this narrow of a high-to-low, 40-day range in the last 100 years. Another analyst found the S&P 500 hasn’t been this tightly coiled since 1928.
What the heck is going on? And what does all this low volatility mean for you as an investor?
Well, some of the blame lies with “volatility selling” in the options market, as I wrote about last month. It’s another way of squeezing a few nickels of income out of the markets in a NIRP/ZIRP world, and everyone is doing it these days.
Some of it also stems from investors anticipating potential market-moving events. The Federal Reserve and Bank of Japan are meeting on policy later this month, and investors are hesitant to make big moves ahead of those events.
Finally, some of it stems from confusion about where the economy is headed. We had a lousy start to the year, followed by a bounce back in June and July.
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| Low volatility means opportunities and dangers. |
Now the question is whether that economic bounce is petering out.
The August jobs figures and other reports on the manufacturing and services sector suggest that is the case. So does the Citi Economic Surprise Index.
The gauge purports to show whether the majority of economic reports are beating or missing economist forecasts. Many bulls crowed about how it “broke out” back in July. But take a look at this chart. The entire breakout has petered out …
I have my suspicions about where things will likely break from here.
The widening disconnect between economic reality and stock prices isn’t very encouraging, and is likely to be resolved by a downside break. Conservative “safety plays” should outperform risky, economically sensitive names. In a pre-recessionary environment, the dollar is also likely to lose, while gold and Treasuries should be winners.
But it makes sense not to get too aggressive until the market actually tips its hand. In your personal investing, I would play things smaller in terms of capital committed until we get a breakout in these various asset classes.
Indeed, in my shorter-term trading service, All Weather Trader, I’m largely watching and waiting … yet also ready to pounce at a moment’s notice. You can get on board if you like by clicking here.
As for my longer-term newsletter Safe Money Report, I have several positions that are already making the most of the year-to-date rally in foreign bonds, select foreign currencies, U.S. Treasuries, and safety stocks. You can get my favorite names by clicking here.
Finally, to get some more clarity on the outlook going forward, I urge you to consider joining me at the live events I’m attending in Toronto or New Orleans this month and next. The MoneyShow Toronto runs from September 16-17 at the Metro Toronto Convention Centre. I’ll be taking part in a panel discussion and delivering a presentation. You can register online by clicking here. Or just call 800-970-4355 and mention priority code “041484.”
Your other option is the New Orleans Investment Conference, scheduled for October 26-29. It’s one of the longest-running, most important gatherings focused on metals, mining shares, and the broad markets. I’ll be joining investment luminaries like James Grant, Marc Faber, Peter Schiff, Stephen Moore, Brien Lundin, and more to talk about the outlook for the remainder of 2016, 2017, and beyond.
You can find out more details and register for the New Orleans Investment Conference by clicking here. Or call 800-648-8411 and mention that you’re calling as a subscriber to Money and Markets and/or Safe Money Report.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 18 comments }
Nothing better than your thinking
Though the senior indexes have trended sideways, broad junior indexes RUT and W4500 have trended up. They’re still below all-time highs set in ’15, whereas the senior indexes made new highs this year and have done nothing since – as you noted. Those junior indexes suffered significant setbacks last last year and earlier this year. It is as though the broad market is leveling everything before the next big move.
This problem gás a name : Donald Trump !
hola viva Donald Trump presidenti
Honey, I shrank the volatility!
Actually, Mike, I found it — it’s in the bond market. All these markets are so connected together now, because of crazy central bank policies and being so leveraged.
Whenever you see tight ranges, look at the Keltner channel. The longer it stays in such a channel, the bigger the eventual explosion out of the channel.
Mike, the answer to where all the volitility has gone is (lol): Since the bankruptcy of Hanon Shipping, volatility has gone to the cost of container shipping. That volitility will then spill into the price of consumer goods and eventually to the economy and the price of stocks that market goods for Christmas. Thus, be careful of the volitility you are looking for, because in this environment volitility could most likely be associated with downward stock price movement.
Almost everyday in the WSJ Legal Notices Section there appears to be liquidating sales of millions of dollars of mortgage backed (or similar) securities. Are banks starting to unload these types of securities- and will they now have to recognize losses on them. If so, how does this affect derivitive holdings. Also, can public accounting firms be subject to lawsuits for failure to disclose the losses and potential losses that could be attributable to derivative securities.
Thanks Mike for doing two articles now on Volatility, not sure I was the only one requesting them… I was really trying to figure it out. I was right on the BREXIT vote with quite a few shares of UVXY the days before. I watched as the price action of securities shorting CBOE did not behave anything like previous drops of about 500- 1000 points. Once VIX soared that morning, it came back very fast with no peak at all compared to the past in similar drops. Orders for flight capital must have been stacked up to the max I thought, but now I know about the options selling by major groups to raise some yield as well. I tend to think that the market is rigged in these discoveries, and I suppose in some cases it is, but at least this makes me feel there is still some free market action and not all Plunge Protection team conspiracies. Great to have technical explanations for these things!
Direction Alerts’ Sentiment indicator has been between 95 and 100 (usually right on 100) for several months, indicating extreme complacency in the markets. Their take on that is that the current long term Bull cannot continue, and that a long term Bear market is imminent. Take that for what it’s worth, but the debt bubble seems overdue for bursting, and I understand that a debt bubble set the stage for the Great Depression of the ’30s.
Hi Chuck,
Could it be simpler than a Sentiment Indicator?
Might it be no more than the smart money getting out of the game and hedging the next
Rate Hike possibility, to encourage the Fed to be Vewwy Vewwy Careful…
Making the Fed nervous can work, just as it has almost every time in the last couple
of years…
There might be another angle at work….here. The direction of the first Presidential
Debate might have been exposed by the last TV appearance a couple of days ago…
Matt Lawer, The possibility that Hillary wears an Earpiece, Bill’s use of the term,
“Make America Great Again” back in 1992… and lastly, the Traders taking some Time-Off during the lull in the campaigning until some certainty shows up…
Maybe the October Surprise is going to be HUGE, and surprise us all….
Good Luck to The Country.
The Fed’s will find some way to bail out Wells Fargo. They are to fearful of another Leman Brothers collapse gary
What’s do God awful about that statement
Mike
Glad, you picked up on this. This means one thing to me and that is the market finally figured out it has peaked and is over valued. The FED has run out of tools to move the economy and corporations and businesses with poor actual cash value are lowering and eliminating dividends, buying back stock, and lastly Laing off larger percentages of highly paid professionals and laborers. So what does it mean, as they say a November Surprise and market crash after the presidential election results are in. I also see oil prices taking off, that will result in much higher inflation, which I believe will gradually start in October. I will avoid being long winded since others know where I am going with the biggest crash in US history. Maybe, there will be a rush for wall safes in residential areas.
Hi Bill,
IF the trend to go to Cash takes off… THAT will cause a devaluation of the currency..
If the Big Players can convince the system that CASH is safer in your mattress than it is in the Banks..
Remember about the time of the 2008 election there was talk about a planned, Mass Run on the banks to cause the Economy to Collapse? Was that an Early Warning, or is it the Same Old, Same Old, Deja-Vu all over again?
Are we being Played again?
Hi All,
I wonder if the Apple buy signal was no more than some advanced knowledge of the Recall
of the Samsung Galaxy Note 7.
FOUND IT TODAY!
Hi Bill & all. I retired 4 yrs ago to b caregiver.As much as I try to be financial literate,I don’t get it,maybe because my F.A enc me to stay where I am with my IRA .We also have invested in gold & that broker is doing the same.We aren’t wealthy ,have diversified but I would like to find a fiduciary as I am very vulnerable .Can someone advise me on what way I should go as I have this gut telling me the non bubble is going to blow b4 too long & like everyone don’t want to lose all my retirement.as in 08. Should I buy more precious metals,pull some out of the banks & hold on to the paper @ home.Would be so grateful for some prudent,wise direction. Thank you. Charlie
The federal reserve and treasury can create money with debt, but they can’t create demand, thus velocity is down. there’s still a drip/drip effect in foreclosures. Dropping savings again.