Now continuing on from yesterday's post where I alluded to the fact that I think that the current market is what I would call a cyclical bull market within the confines of a what is a longer term secular bear market. The reason I say this is because of the way the market has behaved. From the lows of March 09, the S&P rallied a staggering 550 or so points from 666 in the space of just over year. Since the top the market has sold off about 17% rallied back 10% then sold off another 10% and rallied again and so it continues. Only 2 weeks ago was everyone staring into the abyss at SPX 1000 and now we are almost at 1100 again. This market has been anything but calm. In the space of a year we've had many technical records broken. For example (and this is from memory so the facts may be slightly off) the SPY had 16 higher highs in a row (a record), the QQQs most recently had 10 consecutive lower lows (another record), VIX moved 10% up or down for 10 sessions in a row (another record) and so forth and so forth. Compare these types of market movements to the years leading up to the GFC where global markets were in a nice steady uptrend (or a secular bull market as I like to call it). You never saw this kind of volatility where the market would move more than 1% a day which seems to be the norm nowadays and it wasn't one sided back then as it is now. Markets trended but it was slow, steady and predictable. There was a certainty about it. People knew what value the market was many months and perhaps a year into the future. With certainty comes low volatility. And with certainty everyone gets rich as in a bull market, the tide lifts all ships. Financial markets love certainty. To be more correct, people love certainty. Imagine not knowing what time you started work each day, or whether the price of milk was going to be $2 or $20 the next time you went to the shops. Life would be chaotic. I've always said that a perfect world is a certain world and so it is with the financial markets. The problem with the markets these days is that the level of uncertainty is so high that no one knows exactly what is value for the market anymore. One week it should be 1000 because their are fears that Europe will be bankrupt and the next it should be 1200 because that problem has been seen to be resolved to some degree and Intel just had great earnings. Fundamentally the market will want to climb higher because interest rates are almost 0% in most of the western economies but every time the market does rally then another shoe drops because structurally the problems are still there (primarily the over indebtedness of the private sector and now government sector). I've mentioned Japan in the past because Japan had the same type of credit crisis style recession that we've just had and look at how their markets have behaved for the last 20 years.
It's virtually gone nowhere but have a look at the number of times it has rallied and sold off more than 10%. Using my naked eye I can count at least 10 times of 10% plus rallies and sell offs in that time as the market attempted to find an equilibrium (especially right after the big crash in 1990). This is what I think will be the kind of market structure for the equity markets worldwide going forward. We will see these huge rallies and even bigger and sharper sell offs as the market attempts to find equilibrium or steady state to borrow an engineering term. Will it find it?? Nope I don't think that's going to happen for a while as underlying problems will persist and remain unpurged from the system. In the meantime though every time the market has a period where it cannot auction higher or lower (price holds steady for at least 3 days) then there's a good chance it will begin to turn the other way. As an option trader that employs premium selling strategies (income or range trading type strategies), I continue to see very little edge in trading this way. But more on how I propose to trade the market based on the view above in another post.
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