The volatility that had been seen during the prior week was exceeded this week, as we saw many markets experience levels of volatility not seen for many years, certainly not since at least 2008.
The corrective rallies seen in stocks and commodities are currently viewed as corrections in a larger bear market, so they have not impacted on the long-term trends. The current long-term trend position is down for stocks and commodities, but mixed for currencies (mostly favouring the dollar) and mixed for interest rate futures. This means that we have very likely not seen the end of these moves and that bigger moves are ahead.
The S&P 500 fell through the next level of support on Monday but found support from above the October 2014 low. Once the bear market resumes, last week’s low and then subsequently the October 2014 low, which stands at 1790.25 basis the continuous back-adjusted contract, will be the target. It would take a rally back to new all-time highs to change the outlook, and for that to happen following the decline seen recently is not how markets typically behave, so we view that as unlikely.
It’s a similar position for both the Nasdaq 100 and the Dax. The Dax has more room for a decline before it reaches the October 2014 low, which is at 8383, some 1888 points below Friday’s close.
The Nikkei completed a change of trend to down this week, but that change will not be confirmed until Monday’s low, at 17190 is taken out. The rally from Monday’s low has risen to the prior support level, which should now act as resistance if we are to see lower levels again soon.
The VIX, which known as the fear index, shot higher on Monday to levels not seen in years. This indicates that the complacency that has been in place for many investors for a few years is now over. We can, therefore, expect further volatile moves in the stock markets in the near future, and eventually significantly lower prices. The lows seen last week, and the aggressive bounce that followed are probably just the start of what may see stock indexes move sharply lower over the coming months. The biggest up-moves come in bear markets, and the corrective rallies seen over the past few days in stocks are about as big as they come.
From a technical perspective, when looking at a chart, the largest bar visible for the period under consideration sets the trend. This week the biggest one-bars are to the downside, and these bars seen on Monday were the biggest in many years. In spite of the strong rallies seen since Monday’s lows, none of the daily bars was larger from high to low than Monday’s down bars.
The volatility seen in stocks filtered through into some other markets but not to the same extent. There were very big moves seen in energies on Thursday and Friday, but we had not earlier seen the large swings that were present in stocks. When looked at from a larger perspective, the two-day rallies seen in the energy markets are normal corrections in a bear market. They are not as yet trend-defining moves, nor are they anywhere near to being trend defining moves, they are just bear market rallies. The long-term trend for all the markets in the energy sector remain down, and the RSI for each is still in the bear range. Therefore, once these counter-trend rallies exhaust themselves, we can continue to look for new lows.
The currency markets have also seen some wild moves this week. The dollar index dropped through major support but then reversed sharply higher, ending up for the week, and the Euro was a near-perfect inversion of that price action. The biggest move in the currency markets came in the Yen, which saw a huge level of volatility, but ended the week not far from where it began. The long-term trends in the currency markets still favour the dollar on balance.
Interest rate futures
The interest rate futures markets rallied sharply higher on Monday in response to the stock markets sell-off. These moves then reversed as stocks rallied. In spite of the recent strength and the rally seen on Monday, the 30-year T-Bond remains in a long-term downtrend, as does the Long Gilt. The shorter-term markets have each been stronger and saw rallies to new highs this week. These markets have not been able to hold onto their gains and have since moved back below the prior highs. This suggests additional weakness in the short-term.