Yesterday the stock market saw some weakness in the morning and the S&P 500 did close in the red, but the Russell 2000 managed to remain firm and finish up for the day over a percent. That tells me that the stock market is not going to collapse right now. We’re not headed for a drop like we saw in March, however, I do expect that before this year is over that we will see overall stock market volatility actually shrink. I know no one is saying this, but the reason is simple when you look at any of the long-term charts of the market averages. Since I mentioned the Russell 2000 let’s look at the ETF that tracks it.
As you can see the Russell crashed in March and then soared into Labor Day. Those swings caused its 30-day rate of change indicator to go to -40 and then swing wildly back up to 30. That is a wild swing for this indicator on a historic level and as you can see this ROC indicator typically trades in a 20 point range year-after-year instead of a 70 point range.
Look for that narrow ROC trend to return next year. And this is also evident in the 200-day Bollinger Bands width indicator which is at 50. Look for it to head down towards 30 next year.
What this means is that while the market is having its ups and downs, we can look for it to enter some sort of range by the end of the year and drift in it for months on end next year. That means to beat the market averages you need to look at individual stocks, select sectors, and things completely outside of the stock market that are positioned to begin new bull markets.
One thing that has begun a new bull market this month is the price of wheat at just cleared a three year high to bust out of a stage one base.
Remember commodities have a cycle to them – gold and silver go up first and then after they begin new bull markets various agriculture commodities follow. Eventually oil and energy join the game, but they tend to come in last so that point is still out in the future. This move in wheat is significant and there are agriculture related stocks that have been on fire for the past four months. I believe we’ll see wheat prices double in the next 3-5 years. I can’t say the same for the Russell 2000. I explain the concepts of stage one bases and stage two bull markets in my book Strategic Stock Trading.
Earlier this week I talked with David Skarica about what is happening in the stock market and with mining stocks in this video interiew.
-Mike
