A good while since I’ve penned a market-related blog. That there has been nothing good, or of great significance, to report, accounts for it. You likely won’t like this blog either!
Earlier this year, in VIX: Calm Before a Storm, I’d thought the market highly complacent, and, much like the head of equity derivatives strategy at UBS, Rebecca Cheong, also thought that increased volatility and a tumble lay ahead. That was mid-May. Following two failed attempts to rally through a resistance level, in June and July, markets took a sharp tumble in August.
But as in the chart above, markets pulled back up all the way after a double-bottom, with the SP500 index rising to 2100 again. Again, this level proved to be resistance that the move did not break through.
So, whither next year?
In the near term, the SPX has been in a downtrend…lower lows and lower highs. At the same time, relative strength has weakened considerably, from a measure of near 70 down to 50 for a relatively small market fall, of 2.5% or so. This would indicate that the downtrend may continue…which, in a month and year that saw the FED raising interest rates, is only to be expected.
A longer-term chart is more revealing…
Does the chart deceive, or do we see the rounded top of a market turning around after more than 6 years of a bull run? Coupled with a timetable for normalization of interest rates (read that as raising from near zero at present to a level reflecting the FED’s desired inflation rate of ~2%) in a couple of years, or regular tightening in 2016 in simple words, the long-awaited, longer-term, ‘healthy’ market correction seems very likely!
Full disclosure: I hold a small long position in energy at present.