Quarter marked by volatility and weakness
The second quarter of 2010 ended with major market indices losing anywhere from 9% to 11%. Over the past three months, the list of economic notables who warned that the economy still faces serious threats included current Federal Reserve Chairman Ben Bernanke and past Chairman Alan Greenspan.
High unemployment and weak housing sales are two of the major contributing factors that continue holding back the economy. Tuesday a disappointing consumer confidence report sent major indices falling as much as 3% with additional losses Wednesday.
The selling this week finally pushed most major indices below strong technical support—typically a very bearish sign. Summer months are often seasonally weak for equity markets, and this summer is following that pattern.
The chart below shows the Chicago Board Options Exchange Volatility Index (VIX), a popular measure of the implied volatility of S&P 500 index options. Over the past five years, the only time the VIX has been at a higher level is during the market plunge that began in October 2008.
The VIX is commonly called the “fear index” because it is a reflection of expected market volatility for the next 30 days. In other words, it is a good indicator of potential market risk. And right now it is signaling that risk is high.
The next chart shows performance of the New York Stock Exchange Composite over the past year. A little over a week ago, this index along with most others had rebounded nicely. The picture has since had a dramatic reversal. The blue line shows that this week this index broke below a key support level.
The gold line is a 200-day simple moving average. The fact that the NYSE Composite is now moving away from this line instead of towards it is a good indication that additional market declines could be on the near horizon.
The bottom portion of the chart is a relative strength index (RSI). This indicator measures market momentum. Right now the RSI is trending below 50, which means that stocks probably do not have enough momentum to sustain an advance and as a result, market risk is elevated.
For investors, all of this means that this is not a good time to be invested in equities because of the elevated risk level and the potential for additional market declines.
F.S.