Since the DOW made its last peak in January we have seen a wild increase in the magnitude of the daily swings in the stock market. During the last two days of last week the DOW fell over 1,000 points and yesterday it rallied over 600 points.
A lot of short-term traders are trying to chase these moves and have been getting whipsawed.
On one hand breakouts on technical analysis charts have been failing frequently since that DOW peak.
For instance take a look at this chart of BA:
BA is in the DOW and has been a DOW leader that made another new high after the January DOW top at the same time that the Nasdaq did and many leader stocks.
But that breakout led to nowhere as all BA did was go back down to fall below it’s 50-day moving average after it broke to a new high.
Last year though BA never did this it just went up and up and up.
So BA is acting differently now and so is the entire stock market.
What is happening is that stock market volatility is back.
Last year on a daily basis the DOW only went up or down more than one percent three days. Now it is doing it at least once a week and has done it in each of the past three days alone!
The simplest indicator to measure volatility is the VIX, which tracks the premiums that people are paying in the options market for volatility. When it goes up people are expecting big swings in the market. This index broke out this year and is establishing a higher trading range than what it was in last year.
Last year the VIX actually traded below $11 for the longest amount of time in it’s history as the stock market simply floated up everyday without ever pulling back – thanks to the power of robots and buybacks.
But now that trend of record low volatility is over and we actually can expect this new environment of wild volatility to continue if not increase this year.
One impact is that this is going to make it harder to simply buy a stock (or an ETF) and just hold it and make easy money week after week.
A different type of positional betting is required.
Most people in a market like this get into short-term trading, but to do that they need a real plan that involves more than just chasing moves and getting whispawed. Buying now after the DOW went up over 600 points on Monday is a mistake without a short-term plan on when one gets out.
The big question people need to ask themselves is why is this happening.
The answer is to look at past times that volatility jumps like this.
The last time this happened was back in 2007.
Of course when volatility increased in 2007 it did so in March of that year when there was a roughly 10% pullback in the DOW and S&P 500.
After that happened the stock market actually began a classic stage three topping process that led to a new bear market and culminated in the Fall crash of 2008. This is not to say that we are on the verge of a stock market crash this week or that the banks are going to crash again. Each bear market is different and often has different causes. What we are really facing is the biggest bubble in human history only starting to slowly deflate in the global bond market.
Stage three tops in the stock market are directly connected to a continual increase in stock market volatility and decline in the internals of the stock market as more stocks go below their 200-day moving averages to enter bear trends of their own ahead of the market averages. What we are seeing is a classic bear market warning sign.
And that is what is happening now.
In fact the market averages have probably already topped out.
Maybe the stock market hasn’t topped yet. It doesn’t matter, because it is the new trend in volatility that is obviously here and is only starting. We must all adapt and adjust to that. The idea that buying and seeing everything float up endlessly for easy money is no longer matches stock market reality.
The answer to all of this is NOT Bitcoin. Bitcoin was in reality a vicious price manipulation pump done by whales who have now lost their price control. It has not acted as a safe haven against the stock market or even the US dollar, which is also falling in a bear market.
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