Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

The Return of Stock Market Volatility

Stock-Markets / Stock Markets 2012 Feb 12, 2012 - 07:32 PM GMT

By: Clif_Droke

Stock-Markets

Best Financial Markets Analysis ArticleTo say that complacency has reigned in the last few months is an understatement. Volatility as measured by the CBOE Volatility Index (VIX) has fallen 60% since October and 20% since the start of 2012.

To put into context just how much volatility has fallen since the latest rally kicked off in October, the 10-year chart of the S&P 100 Volatility Index (VXO) is shown below. The VXO is an excellent frame of reference for the absence of widespread fear in this market in recent months. As you can see, volatility is approaching historically low levels not seen since before the credit crisis began.


VXO

Options traders often use readings in the VIX and VXO to gauge whether investors have become overly complacent. It has been noted that when volatility subsides to historically low levels like we're now seeing, it tends to generate its own reversal (based on the contrarian principal that the crowd can't be on the right side of the market's trend for long).

But the old saw that retail investors "can't be right for too long" can sometimes be misleading. Check out the years 2004, 2005 and 2006 in the above chart and you'll see what I mean. These were low volatility years by historical standards and the market remained in strong hands for the most part during this 3-year period. The reason for this sustained period of low volatility can be attributed to the position of the longer-term yearly cycles during 2004-2006. The 6-year, 10-year 12-year cycles were either up or peaking during much of this time period. This doesn't even take into account the influence of monetary policy and bank credit factors which were then in effect.

On a shorter-term basis, volatility is largely influenced by the weekly Kress cycles, or more specifically, by the interaction between the peaking and bottoming cycles. Cyclical cross currents create market volatility and this volatility is reflected by an increase in the VIX. VIX has been abnormally low in recent weeks, which has coincided with an increasing level of investor complacency. Again, we aren't justified in assuming that because complacency is high and volatility is low that the intermediate-term uptrend for stocks is doomed. Rather, we must look for answers from the weekly cycles.

The nearest weekly Kress cycle of intermediate-term consequence is scheduled to peak next Friday, Feb. 17 (plus or minus). A second interim weekly cycle will peak around March 9. There is a greater than average chance that one of these two cycles could put a significant peak on the market, though we won't know for sure which of the two dates is most likely to be the interim high until closer to the cycle peaks.

The question we need to examine is whether the upcoming cycle peak next week will put the interim peak on the market. While we must be prepared for this possibility, I don't believe the next few days will witness anything beyond a short-term market peak, which in turn would offer the market a much-needed breather after its run-up of the last several weeks. There is still a strong current of internal momentum behind this market which argues against a major interim top happening right now.

The following chart shows the extent of this strong intermediate-term momentum. The blue line is the sub-dominant interim momentum for the NYSE stock market while the red line is the dominant interim momentum. Both are still rising at a solid rate of change and should act as a support against any attempt by the bears to raid this market in the coming days while the first of the two weekly cycles peak.

NYSE Internal Momentum

Although the broad market still enjoys a strong measure of underlying support from this internal momentum, volatility looks to be on the rise in the coming weeks. The CBOE Volatility Index (VIX) broke out decisively above its 15-day moving average for the first time since November as you can see here.

VIX

Most of the internal momentum indicators which comprise the HILMO index are still in an upward trend. One indicator that is diverging from the rest is the dominant longer-term momentum indicator (below), which is the longest of the internal momentum indicators in the HILMO index. The indicator has made a series of lower highs as you can see here and has just re-entered negative territory as of Friday, Feb. 10.

NYSE Internal Momentum

The interplay between the declining longer-term momentum and the rising intermediate-term momentum discussed previously is likely to create some volatility in the weeks ahead. Volatility was extremely low in recent weeks, mainly because NYSE internal momentum was synchronized to the upside. Now that this is no longer the case, the friction created by these internal cross-currents typically brings about increased volatility, which is normal around a weekly cycle peak. Thus we can probably expect to see more an increasing amount of volatility from here, especially after the March cycle peak.

As an accompaniment to the loss of cyclical support within the next few weeks, we should also expect to see a return of Wall Street's fixation on the eurozone debt drama. Investors have gotten a reprieve from the constant bombardment of negative headline over the Greek and Italian debt crises. That's typical of a market environment were the weekly cycles are synchronized to the upside - in such periods as we've experienced the last few weeks, good news tends to dominate the headlines and bad news is put on the backburner.

With the return of cycle-induced volatility we can expect to see the financial press fixating on bad news once again. And the media won't have to search far in order to find something negative to fixate on: the "Greece trap" is the most obvious choice.

Gold ETF

After confirming an immediate-term buy signal just three days into the New Year, the SPDR Gold Trust ETF (GLD) has closed below its dominant immediate-term 15-day moving average for the first time this year. GLD advanced 8% from its initial buy signal in early January to its recent peak on Feb. 2. On balance, an 8% rally from an immediate-term buy signal is typical, especially when internal momentum is rising (as it was until late January).

Gold ETF

The latest close under the 15-day MA technically qualifies as an immediate-term sell signal for GLD, though there's still a chance this signal will soon be reversed. How gold reacts to the upcoming Greek bailout vote will set the tone for the weeks ahead.

Cycles

Over the years I've been asked by many readers what I consider to be the best books on stock market cycles that I can recommend. While there are many excellent works out there on the subject of technical and fundamental analysis, chart reading, etc., precious few have addressed the subject of market cycles. Of the relatively few books on cycles that are available, most don't even merit mentioning. I've read only one book in the genre that I can recommend - The K Wave by David Knox Barker - but even that one doesn't deal directly with stock market cycles but instead with the economic long wave. I'm pleased to announce, however, that after nearly 10 years of research and one year of writing, I've completed a book on the subject that I believe will meet the critical demands of most cycle students. It's entitled, The Stock Market Cycles, and is available for sale at: http://clifdroke.com/books/Stock_Market.html

By Clif Droke
www.clifdroke.com

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including 'How to Read Chart Patterns for Greater Profits.' For more information visit www.clifdroke.com


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014