Daily Market Update – October 8, 2014 (9:00 AM)
There are lots of people who are dismayed to see the market pointing mildly higher this morning.
That’s because they believe that after a 272 point sell off the real healthy market action would be to have a blow out kind of selling environment. That is thought to be akin to “getting it all out of your system” and then being in a position to start all anew.
The “blow out” theorists do seem to have history on their side, but it tends to be the sort of thing that you see during a protracted market decline and has more false positives than you might want to know about if you believed in that theory. Just look at the period of time between October 2007 and March 2009 and you’ll see lots of declines that could have qualified as “blow outs,” but were predictive of nothing.
On the other hand, there’s probably nothing terribly wrong with creating another one of these 5% declines that seem to occur every two months. We’re less than 1.5% away from having done that and if the past two years is any guide, after having done so it’s off to more new records.
That pattern will remain to be a valid one until it’s broken and it’s anyone’s guess whether we are on a path to break the pattern now, but we should know soon, as the peak to trough back to peak over the past two years has generally been on the order of less than 3 weeks.
But with today being an FOMC Statement release day there may be a little more riding on it than usual. Always something that the market finds a reason to react to, today any change that could be construed as indicating interest rate hikes coming sooner than expected could really tip the already nervous market into something of a blow off kind of selling pattern.
That’s true even though we all know that with each passing month that interest rate hike becomes a case of “sooner rather than later.”
Yesterday’s sell-off in advance of today’s FOMC was surprising and again, there really wasn’t very much of substance to support that kind of selling, although fingers were pointed at Europe. However, the market which had already opened gapped down from the previous day’s close took a real drop sometime after 2 PM without any new news to account for that sell off.
This kind of back and forth alternation between losses and gains, especially in the magnitude of the changes is different from the 5% corrections that we’ve gotten accustomed to seeing. Those have been more based on smaller, but sustained movements lower, just as the bounces higher had also not been characterized by explosive movements.
What that means is also anyone’s guess. In the past 5 years it has both meant a highly tumultuous market with a large net decline, as well as a market that essentially was treading water.
Volatility is now at the same level it was at its peak during the last market mini-correction, when the S&P 500 stood at 1925, which is 10 points below yesterday’s close.
In the past year volatility hit its peak in February, approximately 25% higher than it currently sits and the S&P 500 was then at 1741, which would represent a very sizeable drop from the current level.
However, even that February volatility peak is fairly low by historical standards, so there’s some reason to be concerned, but only if there is a breech of the usual 10% correction threshold.
For those that have cash reserves, despite what appears to be some bargain prices, I would be reluctant to do much shopping, although an occasional purchase can still be a timely one.
If you’ve been sitting back, today seems to be a good day to continue inactivity.