Don't Be Surprised

Anticipation vs expectation

Most of us have been around long enough to recognize that market predictions hold little value. But human beings are attracted to a good narrative. We just need to be careful about turning a narrative into a belief or the expectation of a particular outcome. Better to construct at least two alternatives and have a plan for each.

We are objectively in a market that’s not sure which way to go. We posted this next chart two days ago and the chop hasn’t changed. We have added one element that gives another framing. The anchored volume weighted average price (AVWAP) paints a picture of price levels that can be important for different investors. The green line from the start of the year and the blue line from the late March low are both rising with the current price still above the lines. Good. The shorter red line from the most recent high is in a down trend with the most recent price below the line. Not so good. The blue and green lines might offer some support if investors view those levels as dips to be bought. In the words of AVWAP expert, Brian Shannon, these are “areas of interest.”

Another snapshot of the current condition shows the SPX in the top pane and inverse VIX in the middle pane. This configuration aligns a rising VIX with a falling SPX and vice versa. The bottom pane uses 8 and 21 day exponential moving averages to smooth the VIX wiggles and provide a crossover that can be informative. The yellow vertical lines identify where the crossover went bearish. It should be obvious that there are as many headfakes as there are profitable signals. It can also be said that nothing bad happens without a signal and some were very useful. At the right edge, we’ve gone red and that has me paying attention.

Yesterday’s market action was just enough to send the VIX Mix into the red. None of the 17 components is bullish right now and ten of them are bearish. Consistent with the volatile chop of late.

It also breaks the 8-day streak of neutral readings that had looked promising last week. The trend of our composite gauge has turned down again. Bearish until proven otherwise.

You can’t be surprised to see the sideways volatile market action continue for some time. Uncertainties include the Middle East peace deal, the path of interest rates and the next round of corporate earnings reports that will start in a few weeks. As we suggested up top, better to anticipate multiple possibilities than to expect any one of them. Either way, you may need to be patient.

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