Tuesday, May 14, 2013
Nothing happens during the trading day anymore.
Over the past few weeks, all the action in the stock market has occurred on the opening bell – or shortly thereafter. Then stocks spend the rest of each day locked in a tight trading range.
Traders used to worry about stepping away from their desks – even for just a few minutes to go to the bathroom – out of fear of missing a trade. Now we can take a nap... go for an extended lunch... or even play a round of golf and not miss anything.
Volatility, it seems, has died.
We're not sure why, of course. Maybe the market's one-way run higher this year has lulled investors into such a sense of complacency, they no longer care to do anything while the market is open for trading. Or perhaps the folks in charge of the high-frequency trading programs are under strict orders not to let the market wander too freely during the day.
Whatever the reason... things sure are quiet these days.
There are few "absolutes" when it comes to the stock market. But one thing we do know is periods of low volatility are ALWAYS followed by periods of high volatility. And by the look of the following chart, we may be headed for one of those higher-volatility periods soon...
This is a 60-minute chart of the Volatility Index (the "VIX"). It gives a better picture of the intraday volatility than the daily chart does...
You can see how volatility spiked higher at about this time last month. The VIX ran above 18 and has been trending lower ever since. Now, the chart has traced out a consolidating-triangle formation. And the VIX is currently trading just above the support line of the triangle.
Notice also the positive divergence on the MACD momentum indicator (the bottom box in the chart above). While the VIX has been moving lower, the MACD indicator has been trending higher. This positive divergence often serves as an early warning sign of a change in trend.
So with the VIX at support... with the MACD indicator trending higher... and with investors in general feeling comfortable with the market... now seems like a good time for volatility to rise from the dead.
Best regards and good trading,
When volatility spikes... certain option traders get a "pay raise." Jeff explained exactly how this works right here.
DailyWealth Classic: A few years back, Jeff walked readers through the biggest trade of his career… "My gut was telling me to hang in there. It was screaming at me to hold on with everything I've got," Jeff writes. "After several excruciating minutes of a tug-of-war match between my brains and my intestines, I declared logic the winner." See how it turned out here.
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"Big Pharma" fund PJP breaks out to a new all-time high... up 35% over the past 12 months.
Home improvement stocks continue their uptrend... fresh highs for Home Depot and Lumber Liquidators.