June 3rd, 2010

Your Anxiety is Not Psychosomatic

Is the stock market starting to keep you up at night? Does it feel like you’re being jerked around like a yo-yo? Are you starting to feel dizzy from the knee-jerk reactions to any and every bit of “news” …. like today’s slip-of-the-tongue, maybe-intentional leaks by the President and Vice President that Friday’s labor report will be better than most we’ve seen since the Financial Crises began.

I wanted to learn the causes of my increasing discomfort so I took a look at the daily data. The chart below is not the graph of a lie detector test. Nor is it the chart from a heart monitor. But if this were a medical TV show you’d hear someone hollering “Paddles, Paddles”. Here’s what I discovered (click on image to enlarge):

“So Doc, you’re telling me it’s not psychosomatic? I’m not crazy?” “No, you’re anxious for good reason.”

The above chart represents the absolute percentage change of the daily changes in the S&P 500 Index since the middle of the Financial Crises Crash (what isn’t showing are the intra-day changes which aggravate the fluctuations). Obviously, those of us who survived those traumatic days in September, 2008 to March, 2009 remember the wild daily fluctuations (the box in the center). You can see that it wasn’t uncommon to have swings of 6% or more from the prior days close; there were even two over 10%-swing days. I don’t know about you but there were nights when we’d leave the TV on as we slept in order to check in the middle of the night to see what the futures were and what market’s around the world might be indicating. Those were scary times.

So what’s that box on the right hand side of the graph. Since the beginning of May, the market had several swings of more than a 3% from the prior close. On May 10, the market closed up 4.4%; a change this large last occurred as a decline on April 20, 2009. [Note: In the 2 1/2 years of the Tech Bubble Crash, the market had only seven 4% swing days.]

But there is a reward to weathering the volatility. If recent history is any guide, high volatility can continue for several weeks and it seems to be a precursor and part of a fairly significant bottom-forming process. The greater the decline, the longer the process takes. If what we’re experiencing since the beginning of May is another one of those bottom-forming processes, we may not have much longer to go.

I’ve been looking for one last lunge to around 950. That may be too much or too little. What we can be more certain of is that the remainder of the ride will continue to be wild and bumpy.

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  • Douglas

    Guru:

    I normally like your posts, as you like to let the market trend tell you the sentiment of the market. However, recently, you have shown an extreme bullish bias. I, too, would like to be bullish; but the markets tell me something else. Let's look at this last post:

    On your graph, the first time market swings began to elevate to current levels (4% swings) was March 2008. S&P500 = 1400 & market was topping. Then, the markets calmed until September 2008. S&P500 = 1300. Flash forward to actual bottom in March 2009. S&P500 = 700. So, the market was just BEGINNING its decline, not "in a bottoming process." If anything, your graph should sound alarm bells that a major crash is coming.

    Personally, I think your time frame is too short to correlate anything from the market swings. I agree with your 950ish bottom range. But…your graph sure raises some caution flags.

  • Joe

    Douglas, I struggled with the question when writing that post of whether the increased volatility was bullish or bearish. However, I landed on the side of bullish when I looked at it from a longer term perspective … months rather than days.

    That's where I concluded that the "bottoming-process" could mean a decline to 950 first and after that a nice bull run into next year with a top over 1300. The "correction" everyone has been anticipating for a year is here now.

    Ergo, bearish short-term, bullish long-term. At the end of the summer and into fall could be a great buying opportunity, as good perhaps as last March-April, 2009, as we move into the last phase of this bull market cycle. At least that's what my wish.

  • Anonymous

    The technicals including the correction (pullback) is normal from all patterns I've seen including mine. I take this back/forth an accumulation period (could be short) and see the SP500 moving beyond 1295 in the summer-rally. The wall-of-worry is the necessity we need to get us there.

  • Anonymous

    Lunar move down towards the end of the month, Joe???

  • Joe

    Just checked my lunar calendar and, yes, if the cycle holds, we should wind up with the S&P below 1080 by a week from this Friday, June 25, the last trading before the full moon.