A Year Fraught With Volatility?

As you all know, Mother Nature has gotten volatile -- earthquakes, tsunamis, the most rain in Southern California to kick off the rainy season in 40 years, and snow in Hawaii. That is the way many bulls feel as the second week of 2005 came to a close.

Get used to it. The year just completed, 2004, was notable for a lack of volatility, as it was a very range-bound year.

And, speaking of volatility, my partner Dave Reif (at www.mutualmoneyflow.com) informs me that the last trading day of 2004 showed the lowest 50-day Reif Average Volatility of 2004. So what happened? 2005 opened up with a sharp drop.

The law of alternation suggests that 2005 will be fraught with volatility, unexpected swings in stocks and in the indices as a whole. And the swings will likely be of a larger magnitude than anticipated. In other words, 2005 will likely go against the nature of what 2004 conditioned the majority of traders to expect.

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Although much has been posited about '05 years being up-years, if that in fact plays out -- which I suspect is a better-than-average likelihood based on the influence of the 60- and 70-year cycles -- the way in which that expected '05 advance will play out probably will surprise all of us. The rapidity of the valleys and peaks and their height and depth may surprise us all.

Extrapolating the action of 2004 and using the last three '05 years as a template could be hazardous to all of our health as traders.

Speaking of the counterintuitive -- just as the S&P 500 appeared poised at Wednesday's close for its best opportunity to rally this year, the setup was squandered as the index faltered and closed below its 50-day moving average on Thursday for the second time last week. It then appeared that continued selling pressure would send the S&P lower again for a poor Friday close.

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Jeff Cooper is the creator of the Hit and Run Methodology and the author of the best-selling books Hit and Run Trading (The Short-Term Stock Traders' Bible), Hit and Run II (Capturing Explosive Short-Term Moves in Stocks), as well as a video course, Jeff Cooper on Dominating the Day Trading Market. He also created the Hit and Run Nightly Reports and co-founded a trading markets Internet site.

Mr. Cooper is also a principal at Mutual MoneyFlow Management, a money management firm that is a registered investment adviser. MMM and its affiliates may, from time to time, have long or short positions in and/or buy or sell the securities or derivatives thereof, of companies mentioned in Mr. Cooper's columns. In such event, appropriate disclosure will be made. None of the information contained in Mr. Cooper's columns constitutes a recommendation by Mr. Cooper that any particular security, portfolio of securities, transaction or investment or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. While Mr. Cooper cannot provide personalized investment advice or recommendations, he welcomes your feedback at [e-mail].

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