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Volatility Down, Stock Market Up: What Would Signal a True Correction?

By

Among the new concerns on investors' Wall of Worry is the crisis in Iraq and the troubling situation with corporate bonds.

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Just as the Wall of Worry was about to drop into dangerously complacent territory, Old Man Iraq rears up to give us something to worry about and then some. After a brief and shallow dip, the S&P 500 (INDEXSP:.INX), Dow (INDEXDJX:.DJI), and Nasdaq (INDEXNASDAQ:.IXIC) came ripping back up. The S&P 500 went as far as hitting yet another Rita Coolidge "All-Time High," while the DJIA is now only a shout away from the 17,000 mark.
 
Catching the eye and the concern of most players in and around the markets is the lack of daily volatility in the averages. You can't argue with that; the VIX (INDEXCBOE:VIX) "fear index" is nearing an all-time low range. However, don't overlook that individual stocks are seeing some volatility -- sometimes volatility up (the good kind) and sometimes volatility down (you get the drift). Yes the trend in the market is up and, yes, multiples are expanding faster than earnings, but do not fall into the trap of thinking that this is a "Dart Board Market" -- throw money at any stock you want and you make money. It is not.
 
The Wall added four worries in the last couple of weeks, and so far no single concern has rattled the market too much. Most likely a big one on the horizon could be oil prices. If the price of brent cude, now around $115 per barrel, starts a power move toward $120, we might just have us a true market correction.

Click on the image below for more, or scroll down for a text-only version of Lloyd's Wall of Worry.


 
QE: While the tapering of mortgage and Treasury buying looks to be on cruise control, it doesn't look like The Fed will take its eye off the road or the gas pedal if a surprise turn or hill shows up.

UNEMPLOYMENT: Will the US break below 6% before the eurozone breaks below 11%? Place your bets, place your bets!

INVESTOR SENTIMENT: Volatility down, investor sentiment up. It may just be that simple.

EUROPEAN ECONOMY: They ain't cutting rates because it's good.

HIGH-FREQUENCY TRADING:
Lloyd: Is the low-volume environment tough for your trading?
HAL: See that!
Lloyd: What?
HAL:  A stock traded! All by itself.
Lloyd: It's that bad, huh?

CHINA: Housing crisis brewing? Based on my experience, I don't recommend it.

RETAIL SPENDING:  We'll see signs of life on Mars before we see it in our malls.
 
US ECONOMY: Some say it's too hot, some say it's too cold. None saying it's just right.
 
ECB: "Ain't no stopping us now, we're on the move..."
 
VOLATILITY: Right now, gently rocking like a hammock on a warm summer day. Reminder: Hammocks can flip over.
 
UKRAINE: In the 1700s, Catherine the Great led Russia into coal- and iron-rich eastern Ukraine and then into farmland-rich western Ukraine. Putin's playbook, perhaps?
 
RUSSIA: Backing away but not backing down.
 
US FED: "When doves cry..."
 
VOLUME: Sometimes less is just less.
 
HOUSING: Mortgage rates down, new home sales up. Can it last though?
 
US 10-YEAR TREASURY: Seemingly irresistible to bond buyers at a skinny 2.6% yield. I guess thin is in for the summer.
 
INFLATION: The big question is do we want it or don't we? To which I say... good question.
 
EARNINGS SEASON: Expectations lowered. Check!
 
IRAQ: Here we go again.
 
CORPORATE BONDS: Here's the deal: You can buy them quickly, but you can't sell them quickly. Now where is that red flag when I need it?
 

What Is Lloyd's Wall of Worry?
By Lloyd Khaner

Welcome to my at-a-glance guide to the issues facing investors this week -- a unique tool for traders and money managers.

Typically the term "wall of worry" refers to the entire body of concerns influencing stock market
action. When the wall is high, meaning the market is nervous, stocks tend to get cheaper.

This wall of worry is even more specific. Every week I list the exact concerns in the marketplace and use the list to help me make buying and selling decisions. As I like to say, "Buy fear, sell cheer."

In other words, once the the wall rises above 15 blocks, start looking for deals. If the worry count sinks below 10, consider selling; prices have likely peaked.
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Author holds positions in DIA, SPY, GLD, GDX, GDXJ, EUO.
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