Another Down Week and January: Volatility Takes Over

SP500 3-month Chart

SP500 3-mnth Chart with Basic Technical Analysis

I was wrong in my expectation of market action this past week.

It turned out to be far more exciting than imagined. Earnings numbers have been generally quite good, with more than 70% of SP500 beating expectations, some spectacularly so, and numbers for the economy good as well, such as the consumer sentiment, and a gross domestic product growth of 2.6% for the past quarter. But US markets saw selling this past week that brought the indices down about 3%. The month of January, similarly, also ended down ~3% after five strong swings in market direction.

So – statistics, that implied that late January is typically a good time to buy into the market, proved wrong in this instance. And did so despite good earnings results that should have provided a strong tailwind. Curiously, there is another saying in the market, “As goes January, so goes the rest of the year,” which too is based upon the statistical fact that markets behave over the year as they do in the January of that year more than 80% of the time. But the last year, which also gave us a negative January, proved this statistical expectation a lie! What will we see this year?

I do not like the action in the market seen in January. If you subscribe to the theory that an uncertain market that has good tailwinds (earnings, economic growth, supportive fiscal and monetary policies) will oscillate in a rising trading range, you may believe that the market will once again bounce off the lower Bollinger Band (the outlier excursion expected based upon a standard deviation or statistical analysis), which is just about where selling has brought the market to this past week. Or, looking at the figure above, it may bounce off around that simple moving average trend line drawn under the daily candles of market action. But I am not so confident…such rapid variations in the market, as seen this January, are often signs of a top, and may well be followed by a plunge.

As for the fear index, which I use in various ways to get a feel for the market, here’s a plot of the VIX (SPX volatility index) and the VVIX (volatility of volatility) as of the past week:

VIX and the VVIX for January

Fear Index and its Volatility at end-January

The VIX is above 20 again, or fear remains elevated. The VVIX, on the other hand, has been declining as in the figure above. But the market does not seem to be making higher highs and higher lows, which one may expect in an upward trend…and it could be a matter of much concern if market action next week takes it below ~1975 on the SP500.

In the current scenario, I’d feel more comfortable if the market took a good breather: a correction of ~10 to 15% and a strong rise after that. A ‘V’ dip that exhausts much of the selling negativity. Given market action this January, that may well be expected in the near future.

Disclaimer and Disclosure: I share my thoughts about the market in such blog posts. This is provided only as thoughts of an active trader/investor; it must not be construed as investment advice or recommendations in any manner whatsoever. As of this posting, I am long select equities/funds, and am neutral with respect to the VIX.

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About Rian Nejar

Rian Nejar is an Indian-American author. He trained and worked as an engineer in India, lived briefly in the Middle East, and arrived in America in the early 90's. After a Master’s degree in electrical engineering in America, he worked as an academic instructor, engineer, entrepreneur, and technical writer over the two decades since. Humbling and Humility is the first heartfelt written expression of his varied life experiences. He lives and writes in the Southwest United States.
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One Response to Another Down Week and January: Volatility Takes Over

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