- Volatility and the monthly high-to-low range of the S&P 500 has been shrinking the past 3 months to the point that it’s becoming “compressed” and due to breakout. Volatility looks poised to pick-up in the very near future.
- Companies continue to increase Merger & Acquisition (M&A) activity and stock buybacks. Both are signals that management “thinks” stocks are cheap. However, why have they waited so long to get so aggressive about it when stocks were 40% lower two years ago? Historically both of these have been signs that we’re closer to the end of the bull market than the beginning and it turns out management ends up overpaying because they felt the pressure to “do something” with the cash in the short-term.
- The structure of this stock market rally (low volatility, tight ranges and very short pullbacks) is prone to eventually experience very sharp drops of 10% to 20%. The rally simply gets ahead of itself and prices need to reset. These events can be rather scary but ultimately turn out to be buying opportunities. That is, if you have the cash available. (Reminiscent of the bull market during the second half of the 90’s)
- The Fed is ending this round of Quantitative Easing in October. When QE1 and QE2 ended, volatility in the stock market increased quite a bit. Things even began to get shaky a few weeks ahead of the conclusion of QE2 as traders tried to front-run the end of it. I see no reason for this time to be any different, especially with the gains we’ve seen over the last year and a half.
Despite all this, I don’t think this bull market is anywhere close to being over – potentially just some rough seas ahead in the short-term that will hopefully create very nice buying opportunities.
-Nick
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