Thursday, May 28, 2015

A Boring Market But For How Much Longer?

There's been a fair amount of chatter in recent weeks about the "boring" look and feel of this market.  We've seen a handful of articles, tweets and charts depicting in one way or another the tight range that stocks have moved in for most of 2015.

Just today, Kimble Charting,  posted a study showing the Dow to be in its 4th tightest trading range (through a year's first 5 months) in last 115 years.  Each of the other "tight" years shown in his study went on to break out to the upside.

And given the converging support and resistance trendlines that the Dow is dealing with, he argues that a resolution, either decidedly up or down, could come soon.

A recent post by Bespoke surveyed the year-to-date action in the S&P 500 and arrived at similar conclusions.  They went back over the last 20 years and found only a few times when the S&P had experienced such a dramatic drop in volatility and direction.

So after digesting this and similar data, do we gain any type of edge? Well, one indicator that we and others have pointed to in recent months has been the VIX. Each time the index has drifted near 12 (while stocks have slowly trudged higher) that has been the level in which volatility picks up and markets tend to sell off.  The best strategy has been to fade strength and buy weakness especially when coupled with a low VIX.  

At some point we'll have an upside breakout and follow through but over the last several months the easy money has been made doing the opposite. We saw this on Tuesday when the VIX neared 12 and promptly jumped 20% while the S&P fell 1%.

While the path of least resistance for stocks continues to be higher we'll see if the traditionally lazy summer months are the excuse the market needs to stay boring.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

Ryan on: Ryan Worch on LinkedIn, Ryan Worch on Twitter | Ryan Worch Bio