The market's recent lack of volatility was evident again Monday as major averages traded in relatively narrow ranges before ending mixed and not far from break-even. Don't expect it to stay that way.
Low volatility is often a harbinger of high volatility, as
reported recently. For that reason, many market participants are bracing for some sharp movement in major averages, the only question being in which direction. Notably, two finalists in our recent
Guru of the Year competition have come to opposite conclusions regarding that question.
On the one hand, James Rohrbach of Investment Models issued a "sell" recommendation on the
last Wednesday, reversing a buy call made on Oct. 11. The index rose 10.5% from its close on Oct. 11 through Jan. 22.
"Don't ignore this 'Sell Signal' on the Nasdaq," he wrote. "One thing that is certain, you can't lose money when you are out of the market. If it should turn around on us and we get whipsawed, we will get back in. But at least we are taking out insurance against a big selloff."
Notably, Rohrbach maintains a "buy" recommendation on the
New York Stock Exchange
, intact since Oct. 10. Through today, the NYSE Composite Index is up 3.5% since its close on Oct. 10.
On the other hand, Don Hays of Hays Advisory Group, issued a report today in which he projected major averages will rally sharply in the weeks ahead, offering upside "guesstimates" of 11,200 for the
Dow Jones Industrial Average
, 1290 for the
and 2250 for the Nasdaq Composite.
"If this bull market is going to show that it is a new baby bull market as I so strongly believe, that fake-out period of temporary fear in the last few weeks will leave those panicked sellers in dismay in the weeks ahead," he wrote
Regarding "rising fear," Hays noted the equity put/call ratio rose to 91% on Jan. 16 and that the 10-day Arms Index recently moved above 1.50 for the fourth time in the past year. Despite
controversy about its effectiveness, Hays remains steadfast in his belief in the forecasting abilities of Arms' Index, which measures the ratio of NYSE advancing issues to declining issues by the ratio of NYSE advancing volume to declining volume.
Equity valuations have moved into the "over" category, and the so-called Smart Money Index -- which compares "smart" trading in the final 30 minutes of the session vs. "dumb" trading in the opening 30 minutes -- has been flashing warning signs, Hays conceded. But he retains faith in the bull market scenario because of a view that psychology remains too negative, which is a contrarian indicator, and that robust money supply growth provides further support for another burst higher.
After one more rally, he forecasts, stocks will have "anticipated very effectively the economic and earnings rebound for the next six to nine months, but then it will be time to let the economy and earnings catch
That is, a period of low volatility or "lethargy" will follow. But let's see if the first half of Hays' forecast comes to fruition before delving deeper into that.
In contrast to Hays, Rohrbach does not offer insight into the components of his timing model, and has declined requests for it. So I can't tell you what has brought him to his "sell" conclusion. Additionally, he asked that I delay reporting on his buy/sell signals by two trading days, in deference to his paying subscribers. This is one example of why GuruVision is not intended to be a substitute for firsthand (i.e., paid) access to any pundit's offerings, even those who ask followers to take their recommendations on faith.
Another Voice on Volatility
In that prior story on volatility, John Bollinger, president of BollingerBands.com in Manhattan Beach, Calif., noted that after a period of low volatility the first sharp move thereafter often proved to be a head fake.
The implication being the next sharp move will be an up one, given that major averages mainly moved sideways from mid-November through early January and then fell noticeably from Jan. 4 through Jan. 22.
But the recent volatility "doesn't qualify as a classic setup," Bollinger said in an interview today. "Yes, the
Chicago Board Options Exchange Volatility Index is low and yes volatility is low, but they're not extremely low, and extremely low is what we look for to get big setups from."
Volatility on the S&P 500 had reached its lowest levels in six months, but not to very low levels on a long-term chart, he noted. Similarly, the VIX has been trading in the low-to-mid 20s -- today it dipped 0.7% to 21.77 -- which is low, but the index has often traded below 20. (Hays also cited a sub-20 for the VIX as a key level indicating overcomplacency; he thinks it'll get there soon but is heartened by the fact it's not there yet.)
"Bottom line is this doesn't quality as a classic setup for a squeeze with a capital 'S,' but nonetheless does look like a neat trading opportunity," Bollinger concluded. "Investors ought to be looking at tags of the lower volatility band as potential opportunity. That's what we have here now."
In essence, he's siding with Hays that a rally is forthcoming, but isn't as optimistic about the duration/strength thereof.
Midday Musings about housing and consumer debt touched a nerve with readers, judging by the emails. Clearly, it's an issue worth exploring further, and I plan to do so in a forthcoming column.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.