The S&P 500 Is Ready To Move

| About: SPDR S&P (SPY)


The recent month was pretty calm in the markets.

The volatility indicator is trending downwards but history showed that it won't hold for long.

It seems that the markets are expected to face a massive movement soon. Here is why.

The 45th President's swearing-in ceremony will take place on January 20, 2017.

From the equity market side the atmosphere is almost perfect. Most indexes are floating close to their all-times-high after a massive rally during the last two months of 2016, supported by good employment data and accompanied by enormous expectations from the arriving administration.

On the other hand the Volatility indicator (the Z(30) volatility indicator), which tracks the normalized standard deviation of the SPY, is telling a different story.

Based on an historical analysis the Z(30) percentiles were found to be as follow:

No let's examine the behavior of the Z(30) compared to the S&P500, represented by SPY.

As seen from the next graph, the Z(30) is following a certain wave type of a pattern. A sudden peak is followed by relaxation and then a it suddenly turns around again.

The recent peak was recorded back on December 14th, the day when the FED announced a 0.25 point hike in the Interest rate. Since that day the Z(30) has constantly dropped mirroring a situation of very small changes to the S&P500 index.

When trying to fast forward towards January 20th it seems that the S&P500 is facing a significant challenge to remain at the current 2,260 levels.

The next table summarizes the estimation of the Z(30) indicator for the short term based on different levels of SPY averages during the next 10 trading days.

The color coding is based on the Z(30) Percentiles table that was presented earlier.

The green cells represent scenarios where the Z(30) is trending within the inter-quartile range.

The orange cells represents a deviation to the 10%-25% or to the 75%-90% ranges.

Red means a deviation into the extreme cases of >90% or <10%.

Based on this table the highest probability is for the S&P500 to either take a drastic jump beyond 2,300 points or to face a massive sell-off to the levels of 2,200-2,220 points.

If the index would remain flat or slightly down in the next couple of weeks it would get into the "red zone" which, based on historical experience, is a sign to high volatility risk.


After the recent few weeks of trading within a narrow window it seems that we are up to a massive movement in the S&P 500. If the markets continue to stay put at the levels of 2,260 points in the next few weeks the risk to an aggressive movement would only grow.

I therefore expect that by Jan 20th the markets would be 40-60 points away from the current levels.

I will continue to monitor.

Happy investing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision.

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