Volatility reflects ongoing market risk
A week ago I said it was too soon to declare that the bull trend in place since March 2009 was ending. That same day the Dow dropped 1000 points, although it regained quite a bit of ground before the close. And in spite of the week’s volatility, today most major indices are close to where they were a week ago.
Many investors are no doubt looking back on the past week and wondering about the meaning of such large daily swings in the financial markets. The simple answer—and perhaps the most correct—is that market risk levels remain high. Such big daily moves also show that traders and investors remain fearful about the economy.
Because of that fear, stocks remain in a precarious position. The past week’s nervousness was generally attributed to economic problems in Europe—specifically Greece. But several other countries around the globe face similar challenges. And any of them could be the next catalyst for a major market downturn.
The chart below of the S&P 500 illustrates how quickly the technical situation can change. The blue line is a 50-day moving average (MA). The 50-day MA is a good indicator for identifying intermediate market trends. A week ago the S&P 500 was resting right at that mark.
The gold line is a 200-day MA. It is usually a useful tool for identifying changes in longer trends. Many traders and investors use the 200-day MA as a fail-safe type tool to help decide when stocks move from bullish to bearish and visa versa.
As the chart shows, on May 6 the S&P 500 moved from the 50-day MA down to the 200-day MA in a single session. Such moves are rare. Fortunately, the market rebounded and the S&P 500 and other major indices ended the day well above their 200-day MAs.
This kind of move illustrates that even though stocks have been in an upward trend for more than a year, investors still need to be cautious. Just because stocks are on an upward path does not mean that all is well with the economy. When stocks move up, investors sometimes begin to fear that they are somehow being left behind. But it is important to remember how quickly stocks can drop once fear takes hold on Wall Street.
This time investors got lucky and the downturn was quickly erased. That might not be the case next time.
F.S.