From Mag 7 to the 493: A New Era of Market Volatility
Big tech no longer drives the show. Wild swings in individual stocks make trading exciting again—even as indexes barely move. Here’s what’s behind the shift.
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The good news about a market that concentrates on the 493 and not the top ten stocks is that we have a market where the indexes are relatively calm, and the swings in individual stocks are wild.
For years, when the Top Ten or Mag 7 were in charge, we had terrific moves in the big cap indexes and the stocks that move them, but most stocks milled around and chopped in eighths and quarters—oh, okay, for you youngsters, nickels and dimes.
But now we get wild swings in stocks, and the indexes sort of yawn. That makes stocks more interesting and the indexes rather dull.
For example, a week ago, I did a measured target calculation for you on the Bank Index and drew in this line. At the time, I noted everyone’s favorite group was banks, and yet here we were at the top of the range, and so they looked vulnerable. The Bank Index has fallen four percent in that time.
Oh, I know four percent isn’t very much, but the S&P is up in that time. So, when you look at how the Bank Index has done relative to the S&P, it looks much more dramatic because that relationship is flat on the year.
Speaking of ratios, there has still been no drastic change in any of the ratio charts we looked at on January 5th. Call it steady.
Obviously, with the move in software stocks on Tuesday, we were not going to get folks to push further into the giddy camp. Beloved technology has to at least keep up, if not rally, if we are going to get giddy.
I am still eyeing the end of this week as the point we get to a short-term overbought condition. And that has me looking for a pullback next week. Should that overbought condition be accompanied by some giddy readings in sentiment, I’ll look for a deeper pullback.
The ISE equity call/put ratio already signaled giddiness on Monday. Now we will wait and see if any of the other sentiment indicators join it. In that vein, the put/call ratio for the VIX has moved quite a bit in the last month.
Here is a chart of the 21-day moving average of this ratio. Keep in mind, if we have a low reading, folks are looking for the VIX to go down; therefore, we take that as they are bullish on stocks. And we assume they are pros, so we don’t want to go against them. The decline in the moving average has been persistent, but this week we got our first high reading (.91) since mid-December. That, to me, is a sign that while the retail traders at the ISE are getting giddy, the pros at the CBOE are starting to look for a higher VIX (they are in my camp!).
Earnings season seems as good a time as any to shake things up.
