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Thursday, June 4, 2015

Daily update 6/4 Low volatility periods

Break down.  Well sort of.

SPX closed below the lower trend line and confirms the break of the 18 SMA.  Volume increased a bit.  Breadth was -75% so selling was broad based.  New highs dropped way down to 40 while new lows popped up to 82.  That is the most new lows since the March pullback.  Today turns the short term trend for SPX to down.  That must mean it is about time to bounce.  At least that is how it seems the last few months.  Every sell off gets bought and every bounce gets sold.  Is this for real this time or just another fake out?

The futures ended the day below the 100 SMA.  However, we do not have confirmation of the break yet.  While SPX closed at a new low for this pullback, the futures rallied after the close and are back above the prior lows.  That is why I said we sort of have a break down.  The futures already unbroke down.  To confirm the break down the futures need a bar to close below 2091.25.  That is almost eight points below where we are now.  No telling where we will be in the morning.

Tomorrow's employment report may move the market or be a none event.  I won't try to guess what it will be nor what the market reaction will be.  The bears need to see follow through to determine if today's move down was a significant break or not.  The bulls need to get a bounce with some real vigor to mount another test of the highs.  It is clear there is a sizable number of people in both the bull and the bear camps.  So far the dip buyers keep showing up, but every bounce is sold.  We are drifting down rather then the usual sharp sell off.  So far the bears have the bigger hammer.

The SOX was the latest of important indexes to make a new bull market high and fail to stay there.  That type of pattern is common at bull market tops.  Think about how most bull market corrections/panics get started.  There is usually a sharp sell off that occurs while most all indexes were at new highs within days of each other.  The following price action usually has several ups and downs with no major indexes hitting new highs.  Once the correction/pullback is over the indexes start making new highs again and continue on.  Most bull market tops have indexes topping months apart.  We clearly have that now.  For this market to make a new leg higher all the important indexes need to get to new highs.  That would increase the daily number of new highs.  Nothing else will do it.  If we keep going the way we are now there is no doubt this market will break down eventually.  It is inevitable.  More and more stocks are doing just that individually.  In the end they get them all.

Everyone has heard the expression volatility reverts to the mean.  There have been periods of very low volatility (VIX mostly below 20).  Those periods were followed by much higher VIX (mostly above 20).  Lets look at those low VIX periods.

Those low volatility periods seem to last roughly three years.  If history is any guide we may be getting close to the end of this one.  Higher volatility does not necessarily mean lower prices, at least in the beginning.  The late 90s saw lots of volatility with rising prices.  So don't be surprised if volatility starts picking up soon and stays elevated.


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