More and more, we seem to be living in a market of extremes. Market Profile creator Pete Steidlmayer made an interesting observation when I sat with him some time ago in his office inside the Chicago Board of Trade. Pete said that markets are making deeper retracements because of the types of trades being made. Large institutions and hedge funds control more and more money, so the market is now made up of 10 people trading 1,000 lots each instead of 1,000 people trading 10 lots, as it used to be. This leads to markets moving rapidly from extreme to extreme, especially in terms of indicator readings.
This polar market is at it again. Regular (and long-suffering) readers of this column know that the new "risk-on, risk-off" dynamic tends to cause steeper and more rapid swings in both directions. Lately, we've been in one of those swings-this time, to the up side.
As always, the meaningful question is, "Where do we most likely go next?" Are we in the middle phase of a bigger push up, or is this trend getting tired? In just the last few days, several interesting things happened that may give us some insight into the state of the current move.
For the First Time in Five Years
Once again, I find myself focusing on one of my favorite short-term indicators: the CBOE Volatility Index ($VIX). People like to call this the "fear index," and in the last few days, it has hit its lowest level since the times long before the real estate/credit bubble burst. To be precise, the $VIX hit a low at 13.30 on Friday 8/17. The last time it was that low was on June 20, 2007!
Here's a monthly bar chart that shows the S&P 500 with the $VIX running along the bottom:
Another noteworthy technical occurrence showed up on Tuesday (8/21). In this chart of daily S&P 500 bars, we see a really interesting confluence of technical attributes in yesterday's candlestick:
We need to bear in mind that technical analysis is just about probabilities. That said, the coincidence of a potential double top at a multi-year high combined with a multi-year low in the $VIX should at least put us on high alert for a trend reversal.