The stock market volatility is in collapse again. This isn’t that unusual, because in the past six years each month of August has brought with it a collapse in volatility.
If you don’t know volatility shrinks when the stock market averages barely move anymore in any given day on the technical analysis charts. This causes the VIX to go down to its lows, which it is now doing as it closed last week below $12.20.
But the 20-day Bollinger Band width indicators are also now narrowing on the SPY ETF, which tracks the S&P 500.
As you can see from this chart the 20-BB Width indicator is now almost below $2.50 for the S&P 500. Historically when the Bollinger Bands would get this narrow for the stock market you would see a thrust in market action for several weeks to cause the bands to expand.
In 2015 you could go back over 100 years of market history and see that happen every time the bands narrowed, but beginning that year that stopped happening every single time.
Something changed.
And what changed was a tipping point in the growing influence of trading robots and stock buybacks in keeping the market afloat – thanks to low interest rates on the part of the Federal Reserve that enabled companies (and private equity firms) to borrow money in the junk bond market to finance stock share purchases whether that means companies buying their own stocks or buying other companies out.
That has not ended and is going to continue for now with this week’s Fed rate cut – a necessity to keep this process going when corporate revenue growth is weakening.
The important thing for us though is to recognize that volatility is collapsing again.
So what does this mean?
In normal times you could expect the market to make a big swing here. That would mean the launch of an exhaustion rally from here much like January of 2018 or a quick pullback. If a new upswing begins then look for it be led by the Russell 2000 in a breakout of the IWM ETF.
But since these are not normal times I think we can expect the stock market to simply drift next month and put people to sleep.
At this point I really see no easy way to make money trying to trade the market averages and that’s why I believe it is more important to focus on individual stocks and sectors than ever before.
My top stock pick for July smashed the performance of the averages and I’m expecting a new August pick to do the same thing. I talked about that in a recent video you can watch by clicking here.
-Mike
