Expect Exaggerated Volatility in the Weeks Ahead

Well, what is it? It’s an emotional response, say some. Others say to sell everything. Only the future knows, and it is not sharing. I asked it for the winning Powerball number, and there too, it didn’t comply.

What I do know is that markets have been in a state of relative non-equilibrium. In this state, they tend to have major moves beyond rational expectations and often in the absence of obvious new information. Nothing definitive caused the Shanghai Composite Index to drop 7% on the first trading day of the year, but it happened. And investors globally reacted.

Whether the sell-off is done or not, concerning U.S. equities, I feel comfortable framing key price levels that will need to be breached to suggest a continuation of the 6-year bull market or the 6-month bear market (depending on your perspective). The 1870-1880 level in the S&P 500 was breached or tested in October 2014, August 2015, September 2015, and again this week. In each instance, so far, a reasonable rally ensued. On the upside, this past early November, the index reached within 20 points of its May all-time high. The same general scenario played out in the NASDAQ and Dow. A rally here to 2100-2130 would be welcome by most, but a sustained move above the May 2015 and November 2015 highs is necessary before the bears can hibernate. There seems to be a high likelihood that, within this price band of 1870 to 2030, markets will emulate their behavior between August and January of this year, namely exaggerated volatility. This behavior should not come as a surprise to those who are viewing markets as complex systems. It is just time for them to be acting like what they are.

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Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. Accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.