It has been a rocky start to the new year for the S&P 500, as represented by the SPDR S&P 500 ETF Trust (SPY). After three years of low realized volatility, the writing on the wall is becoming increasingly clear that 2015 may well see the return of more meaningful swings for stocks. Traders would be wise to take notice of and respect these signs.
While my base case still is that U.S. stocks are in a longer-term secular bull market, the cyclical bull market within the secular trend has been showing signs of exhaustion for some time.
Yes, it was only a couple weeks ago that the SPY ETF marched to new all-time highs, but the notable pickup in volatility in commodities and currency markets stands a good chance of ultimately infecting equities — if only for a few short months.
It often is said that volatility in commodities is a precursor for volatility in equities. Furthermore, whenever we see a major commodity get hit hard — such as the halfing of the price of oil last year — it rarely goes unnoticed by equities.
SPY ETF Charts
If we look at the multiyear chart of the SPY ETF, we can see that just a few months ago in October, stocks experienced a short but severe shock. The SPY dropped almost 10% in a matter of a few short weeks, only to recover all of it (and more) just a few weeks after that.
The takeaway from the October V-shaped move isn’t that the market quickly recovered, though, but rather that it might have been just a first glimpse of what’s to come in the first half of 2015 in terms of volatility.
While the multiyear uptrend on the SPY ETF (black channel) remains intact, note that the Relative Strength Index (RSI) topped in November 2013 and has made a series of lower highs since.
Another way to look at an increase in volatility is through the Average True Range (ATR), which I added at the bottom of above chart. Note the sharp rise of the ATR last October, but also see that after a drop in November, the ATR is now right back up to where it was in October. For the past few years, the 14-day ATR measured roughly about 1.5 points, but now the ATR is nearly 3 points per day, or double that of recent years.
Last but not least, on the closer-up daily chart, the SPY ETF last week marked a lower high versus its late December highs, and with a wild intraday swing on Tuesday, the fund rejected a rally attempt by the bulls.
Quicker traders and investors could use last week’s highs in the SPY near $206.50 to lean against on the short side with a price target near $192 while keeping the concerning signs on the longer-term charts above in mind and respecting the fact that tops take time to develop.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
