It’s Quiet Out There, Too Quiet

 

Random Thoughts

It’s quiet out there, too quiet. The market, basis the Ps (S&P 500) has begun to flatline. On a net net basis, it hasn’t changed in a week. More complex measurements such as the 6-day historical volatility vs. 50-day volatility ratio has dropped to extremely low levels. As mentioned in Monday’s column, volatility waxes and wanes. When it gets this low, a big move is just around the corner.

The reason you often get a volatility spike after it compresses is because traders don’t agree for long.

One interesting thing that can occur from a low volatility situation is that the first expansion in volatility move is often a false one (I hate to show my age, but I wrote about this in the late 90s. Google “A Volatility Trade In Gold”). With that said, I think I’d like to see  a spike lower. Again, that would shake out the Nervous Nellies and could clear the way for the next leg higher.

Regardless of what you think might unfold, just know that quiet markets don’t stay quiet for long. Therefore, don’t take comfort in the fact that the market is just bumping along.

“In times of peace, prepare for war.*”

Let’s look at the scoreboard:

Again, the Ps ended in flatsville.

The Quack (Nasdaq) lost around a third of a percent.

The Rusty (IWM) got hit fairly hard, losing more than ¾% for the day.

The Rusty was a little more indicative of what happened internally on Monday. There were quite a few sectors that sold off a bit. Not enough in numbers or magnitude to get excited about but there was internal weakness—more than the major indices would suggest.

Drugs ended higher. Biotech here stabilized and managed to finish slightly higher. I’d like to see new highs here soon.

Gold and Silver stocks continue to push higher from their lows. Don’t be a hero here just yet. Wait for buy signals.

In the Rare Earths, Uranium appears to have woken up. Watch for setups here (we are long UEC).

There’s not much else to report. Most sectors remain in uptrends and most pulled back a bit on Monday.

So, what do we do? I still think Uranium has potential. Ditto for Biotech. Other than that, I’m not seeing a whole lot of setups just yet. This is because the methodology requires a pullback and the market really hasn’t pulled back—yet. Do brace for a large move soon. Honor your stops just in case. He who fights and runs away lives to fight another day.

Best of luck with your trading today!

Dave

*Sun Tzu