Volatility Remains Elevated Until the Bulls are Ready Again

While stocks didn’t much on the surface on Wednesday, it was definitely disappointing for the bulls that there hasn’t been any follow through from Monday’s big reversal. The bulls should make another attempt on Thursday. The pullback theme remains intact, but we are starting to see some more encouraging readings in the sentiment area, specifically on the ETF volume side. The most prominent ETFs, SPY and QQQ have seen volume spike lately which means that investors are favoring the liquidity of the basket of stocks over the individual stocks themselves. That usually occurs near at least short-term lows. Additionally, volume in ETFs that go up when stocks go down has also spiked as traders position for more downside. This behavior, too, is typically seen as the market tries to find at least a short-term bottom.

I still expect volatility to remain elevated as stocks continue to work through this short-term bout of weakness that doesn’t have the feel of being done just yet. Of interest through this is that the currency market has been relatively quiet. There has been many postings about LIBOR and the TED spread showing strain in the financial system, but the currency markets aren’t confirming this. Our banks continue to lead and trade fairly well.

There is probably a little upside and another shake out to the downside coming before the uptrend resumes, but I remain of the opinion that weakness should be bought.

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