Last week the equity market was prime for a typical options expiration week breather. After all the month of February is the most lethargic in the November-April cooperative season. Not this time as the S&P 500 is up over 2.6% for the month, with several other indices/sectors eclipsing that mark. Not only have stocks performed well, but again volatility appears to being wrung out of the market.

From a tactical standpoint that is not a good thing. Little wiggles intimate a couple of  challenges for those looking to outperform the market. First is fewer signals are created as there is generally one big bar of movement followed by very tight little ones. No signal emitted in that pattern. Second is the overall movement is not enough to create a profitable move on a regular basis. Miss the big bar miss the move. Never been on one, but I would imagine it is akin to a PI stakeout, predominantly very boring with sudden bursts of excitement.

The current environment reminds me of early in Trumps administration. After the initial burst through his inauguration, stocks ground higher through the year with most pullbacks lasting one-two days. The paint drying finally led to a breakout in the fall culminating in the parabolic move in January.

This lack of volatility has been relatively the norm since the financial crisis of 2008. There have been several theories for this, most notably the Central Banks of the world providing free money in order to prevent a deeper crisis (essentially solving a problem with the strategy that created the problem). The free money had to be put to use so every pullback in equities was immediately bought, sell signals failed quickly.  

Another theory points to the algorithmic computers as the culprit. They perform millions of trades in microseconds and do not need wide swings to grind out profits, thus keeping equities in a narrow range. These microseconds became so important to the firms executing this strategy they bought buildings located closer to the Exchanges reducing the time to effect a trade. This fraction of a second gives them a distinct advantage over traditional investors. Michael Lewis wrote a fascinating book Flash Boys about this dynamic.

Another downside to this lack of volatility is I do not have as much to write about. We are certainly due for a correction, but it is difficult to short a market without definitive signals. We tip-toed into the most overbought index last week, the small cap Russell 2000. That negative divergence failed and we are underwater so far.

I have often wrote about how a full moon can be a turning point for the trend of the market (note it is not always a downturn). I know that might sound ridiculous, but just ask emergency room doctors about full moons. Today we experience the Snow Moon, the biggest and brightest of the year. Maybe it can slow this market down and give me something to write about?

Final Thought –

“A clear conscience is usually the sign of a bad memory” – Stephen Wright

More later,
Max Power

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Disclaimer: Remember everything I said could be wrong, the market always has the last word.

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