Narrow ranges and light volumes are the subject of a recent blog post by Brett Steenbarger in which he talks about the impact of such market conditions on trader performance. Brett’s specific focus is on stocks, but as I’ve written before, low volatility has been a feature of multiple markets such as interest rates and the USD.
Specific attention has recently turned to the VIX. As can be seen in the daily chart below, the so-called Fear Index has reached its lowest level since the first part of 2013. When the VIX is low it tends to make some market observers nervous, getting them looking for stocks to take a tumble.
We’ve seen quite a few low VIX readings in the last couple of years, and they have indeed generally been followed by some kind of market reversal. While those downside moves have at times been quite sharp, they’ve never done any real technical damage and the overall trend has remained positive. In fact, the high volatility episodes have tended to be relatively brief, which is often a good indication of a strong trend. Still, a quick 5% drop like we saw the S&P 500 experience early this year is something which can rattle traders- perhaps even more so in a situation like we’re in now where at least part of the market is quite sensitive to the idea that we’re due for a reversal.
While I certainly can envision the S&P 500 experiencing a sharp sell-off at some point in the not too distant future, I’m not overly worried at this point about a major top developing. The market psychology doesn’t really feel excessively positive to me here. I will, however, be keeping an eye on how the ranges in the currency and yield markets eventually resolve, as they will certainly play a part of the future direction – and amplitude – of the stock market’s path forward.