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The Boredom Before the Storm (Time to Buy Volatility)

As eventful as the past few months have been (what with Greece, California, Illinois, Iran, the Lehman Brothers revelations, U.S./China trade friction, and record deficits just about everywhere), you’d think the financial markets would be agitated, to put it mildly. Instead, just about everything is range-bound, and the things that aren’t, like U.S. stocks, are trending slowly, reassuringly, higher. This has taken the VIX, the main measure of fear (i.e. volatility) in the options market down to levels last seen before the 2008 crash.

Here’s how today’s Wall Street Journal puts it:

For the Dow, the Quietest 6-Day Streak

The U.S. Federal Reserve announced, as expected, that it would keep its key lending rate at virtually 0.00%.

Across stocks, bonds and commodities, the big swings of just a few weeks ago have evaporated, leaving markets to muddle between small gains and losses for most of March.

To date, there have been two days this month when the Dow Jones Industrial Average swung more than 100 points during the day. Even the Federal Reserve policy meeting on Tuesday couldn’t incite much interest: The Dow did extend its winning streak to six sessions, but rose a modest 43.83 points, closing at 10685.98—adding just 133.46 points or 1.26% during the run.

Compare the calmness with February, which produced triple-digit intraday moves on 14 of 19 trading days, or January, which saw them on 11 of 19. The first four months of last year saw moves of more than 100 points every day.

The VIX index, a gauge of volatility, has dropped 9.3% this month and at 17.7 is a quarter of where it was a year ago. The Merrill Lynch Move index tracking Treasury options volatility last week hit its lowest level since July 2007. And crude-oil volatility is down to 33 from 40 on Feb. 5 and above 90 at the heart of the crisis.

While a calmer market may make for calmer investors, it is bad news for traders for whom big swings spell profit potential. “What you have now is a combination of people not having to do anything and people not knowing what they want to do,” said Mike Shea, managing partner at brokerage firm Direct Access Partners.

The difference between now and February: Fears of a default by Greece have subsided and investors have become more sanguine about the economy. That might be boring—and unprofitable—for some, but it also may be a lull ahead of another move up for stocks, some traders said.

After February’s turmoil, many aggressive sellers are tapped out, said Cleve Rueckert, a technical research analyst at Birinyi Associates.

“We’re more in a place where the market is comfortable with prices,” Mr. Rueckert said. “We’re looking for stocks to coast moderately higher.”

What does this mean? It means money managers are bored and complacent. They’ve been burned by betting on continued volatility of one kind or another, so they’re pulling back and — as they generally do — extrapolating the recent past into the indefinite future.

This in turn means that all hell is about to break loose. Rising stocks and stable gold, oil, and interest rates are an impossible combination in a world with big and growing imbalances. Continued growth fueled by government borrowing and bailouts will send interest rates and gold up. A return to hard times (due to a housing downturn, California default, or failed debt auction?) will send stocks down.  I’d imagine fewer people will be inclined to earn a finance degree in this environment.

Anyhow, something has to give in a big way. And when something has to happen, it eventually does.

So either today or very soon, the boredom will end and it will be time to go long volatility again.

9 thoughts on "The Boredom Before the Storm (Time to Buy Volatility)"

  1. Jason I agree, there are more than one theory about what will happen. That being said, and I realized it today when talking with a good friend who was speaking of the same thing, and seeing it for my own eyes. I think I will error on the side of caution, which means I will go long metals, but only to what I can pay for in my hand, the reason is simple. If and only IF, ALL assett classes are set for a upwards supercycle, what can that mean? it points to a problem with the currency, not there is a great demand for any one thing., especially in light of the economy. I am fearfull and greedy at this point. I hope I am wrong.

  2. I’ve read a few articles by those who suspect the stock market rally is long in the tooth and is posed for a 2010 crash. When looking at fundamentals and the next 2-year wave of foreclosures, that makes sense. There’s little doubt that we’re experiencing a cyclical stock market rally in the context of a secular bear market. P/E ratios using GAAP are destined for compression down to 10 or so for the stock market bottom.

    If I’m not mistaken, Martin Armstrong has mentioned that his PI-cycle has inverted recently and we could be looking at an even higher DOW into mid-2011 rather than the market bottom. I believe there is a minor Kress-Cycle also that peaks in 2011 before the 60 and 120-year cycles bottom together in 2014. I don’t know how accurate these cycles are at predicting stock market movement but I would keep an open mind. We’re living in Alice in Wonderland times economically and politically. So, before the end of 2014, we might be staring at a DOW of 5000 and gold of $2500. But I wouldn’t count on that to happen in 2010.

  3. Gentlemen:

    I got out of the stock market in 1999 about six months ahead of the dot.gone bust. I have not bought a stock since. We moved our retirement into the G-fund and contribute to the TSP. We have some eagles, maple leafs and British sovereigns in our possession. Additionally we keep modest maintenance amounts in Bank of America checking/savings and our short term cash is in a local credit union.

    Political differences aside, I am more than a tad curious as to why you even trust the markets.

    All the best,

  4. Robert,

    I do think precious metals’ prices have inflated for the last year or so because of the liquidity splurge, and I would not be surprised to see them fall temporarily when stocks (and all other asset classes) deflate as the result of the carry trade unwinding. A great buying opportunity if one can time it right, because soon afterwards I think most investors – individual investors in particular – will finally understand that gold/silver are money and not just another commodity, and will realize that it is the only safe haven left to preserve their buying power. I would expect gold/silver to then sky rocket in price singularly in terms of the prevailing currency. I believe there are enormous forces at work to provide time for the insiders to position themselves with an exit strategy (i.e., dump assets to the dupes, buy gold and duck) and to establish the conditions for a one world currency and government. Sounds crazy I know, but such things have been discussed openly for decades now by the IMF (the likely the one-currency Reserve Bank), and Presidents Bush and Obama, among many others (listen to some of the interviews on KingWorldNews.com.) All of the fiat currencies in the world today are failing and so it will seem to be the only/best solution to the whole mess. In the meantime, those with gold/silver should retain – if not gain – buying power after the dust settles. Unfortunately, I have no idea how long this will take to play out.

  5. I’ve been short the SPY and Russell (via the SPXU and the TZA) for the last few months, accumulating positions on rallies. Needless to say, I’m feelin’ the heat. One of these days, reality is going to catch up to the market and I’m going to make a few bucks. Until then, I’m in the Red

  6. Im on the fence myself, the short term looks good in stocks, but for how long? If a pull back comes again in the next month, it may be a buy (options only for me) for a few months as people become emboldened by the lack of future bad times gives way to liquid driven markets. (maybe the explosion of inflation?) Im more worried how that may affect metals, if it is inflation they will go up? if good times speculation will they go down? should I wait on buying more metal or just do it now and faggetaboutit? Interesting times indeed! Happy St. Pat’s to you too and all 🙂

  7. Of all the financial “rules” that I know, the one that has proven to be the most forceful is the admonition to “not fight the FED.” When the FED decided to inject liquidity into the economy in March ’09 to inflate asset values in order to counter the deflationary forces of the collapse in credit, there were some who said that stock prices were going to rise come hell or high water, and they were right. I underestimated the power of the FED and did not invest back then thinking it was an unstable sucker’s rally. Now I’m stuck in the uncomfortable position of still thinking the same way and perhaps being wrong again, or at least too early again.

    Here’s to a speedy resolution of the madness. Happy St. Pat’s!

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