What Is The Current Market Volatility Telling Us?
- The extreme volatility in the equity markets - a "jagged-shaped" price pattern - is a sign of a new market environment.
- This type of phase is often the sign of a market in indecision and ready to change direction fundamentally.
- With a too-long bull market, this volatility is an indicator of the end of the current market environment and will be a precursor to a new bear market period.
Whilst much chartism proves to be ineffectual and largely just a market ideology, some of it gives periodic insights into market sentiment. It does this often not on a stock-specific basis, but often more on a general macro market basis.
So what are we seeing in the macro market today? We are seeing “jagged teeth,” to use my own phrase; the market is in an extreme stage of volatility, with wide swings up and down nearly every day. The smooth(ish) and gradual rise in the equity market that we have seen for years now does not look like it is continuing. We are, in other words, entering into a new phase of equity market evolution.
What exactly is that? Well, essentially, a too-long bull run is tired and coming to an end. This is coupled with rising interest rates, both as a deliberate policy in short rates from the Fed and a natural back-up in bond prices on the longer end of the yield curve. The discount rate is rising. There is nothing intrinsically wrong with the underlying US economy (this is a moot point - but at least nothing quite as dramatic in nature as what we had in 2007-08). But cycles come and go, and this cycle is entering that phase which shows the sign of... old age.
Those “jagged teeth” are a signal of a market that has now lost its way and is in the beginning of a slow loss of confidence. It is a trend one notices for longer or shorter periods before many markets enter into a bull phase - one sees a period of indecision and high volatility.
This volatility is, therefore, I believe, the beginning of the end of the long bull run we have had since 2008, and will be a precursor to some period of bear market conditions. As it is, the bull run we had was much longer than historical averages, and its time has come. Other signs in related markets support this thesis. Consumer credit has started to become much looser again, with significant sub-prime lending activities in the shadow and even mainstream lending market - excess consumer lending is always a sure sign of an overstretched market environment. In addition, the boom in real estate is showing signs of weariness in both commercial and residential markets.
Macro market predictions are always dangerous, and things could always turn around again for this market, but the volatility has gone on for sufficiently long to indicate an existential loss of confidence. The angst is deep, and the end result will not necessarily be a crash but a new bear market phase once this period of “indecision” is over.
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