Like A Yo-Yo

I’ve been trying to come up with the proper comparison for the recent movements in the stock markets. Yo-yo, bucking bronco, coiled spring, and several others have popped into my head. Rather than using tired cliches, let’s let some pictures provide the description: 

S&P 500 Index (SPX), 1 Week Chart, 2 Minute Bars

(Click on image to enlarge)

Source: Interactive Brokers

NASDAQ 100 Index (NDX), 1 Week Chart, 2 Minute Bars

(Click on image to enlarge)

Source: Interactive Brokers

CBOE Volatility Index (VIX), 1 Week Chart, 2 Minute Bars

(Click on image to enlarge)

Source: Interactive Brokers

The theme should be quite clear. Markets have been bouncing up and down after a recent drop. On last Friday and yesterday, we saw indices try to regain the ground they lost on the prior day. 

It didn’t bother me that markets tried to bounce. That is to be expected after a sizeable drop, and SPX had fallen over 1% on Thursday and Monday. What bothered me is the way they bounced and the character of the moves. We opened higher, which is to be expected in an environment when “buy-the-dip” has been a generally reliable strategy, but the relentless follow-through seemed much more like traders simply chasing moves than investors pursuing fresh values. Notice how we dropped as we approached the close on each of those rally days. I read that as traders not wanting to go home long after chasing higher prices all day. Unfortunately, Friday’s rally appeared to be a sucker’s rally, and it remains quite possible that yesterday’s bounce could prove to be another.  Fool me once, shame on you; fool me twice, shame on me.

SPX Implied Volatility (white), 10 Day (yellow), and 30 Day (orange) Historical Volatilities

(Click on image to enlarge)

Source: Interactive Brokers

It is quite clear that we have entered a period of higher volatility, as evidenced by the graph above. We can certainly debate whether the volatility is transitory or persistent. It is my contention that the prospects for monetary and fiscal stimuli have become much more uncertain, and uncertainty begets volatility. That’s what makes markets. It depends upon the likely pace of Fed tapering, whether this Friday’s payroll numbers might boost employment sufficiently to push forward a potential interest rate hike, and whether Congress can get its act together regarding the debt ceiling, infrastructure spending, and a budget reconciliation. If those all get resolved quickly and to the market’s liking, volatility should ebb. If not, the market yo-yo could keep bouncing along.