It was another lackluster trading day for US equity indices yesterday as the S&P 500 traded in a range of roughly eight points, which compares rather boring to the intra-day swings of more than twenty points that we witnessed just one month ago. To put a picture around this, I created the below chart. The chart shows the S&P 500 benchmark index and its so called average true range, which simply-put measures the index’s daily trading range. Note that during the month of June the average true range steadily rose toward a peak on June 24th of around twenty four index points per day. Also see that the rally off the June lows has again caused the average true range to collapse by just about fifty percent. While rallies do tend to come on less intra-day volatility, what’s notable is that the duration of the rally and decline in the average true range is now once again at a point where a mean-reversion move in price (lower) of whatever magnitude should not be far away. Also important to point out is that typically an uptick in the average true range precedes a decline in prices. As such, while I still have a couple of long positions on the books, I likely will close those upon arrival of more volatility.
The techno0logy space, here as measured by the Nasday 100 ETF (QQQ) has flashed notable negative divergence versus the S&P 500 as well as the Russell 2000. I discussed this on Monday but now drew the below chart, where I pinned all three indices against each other. Far be it from me to declare the large cap technology group to be a brilliant leading indicator for the broader market, but since this divergence has now been underway for close to one full trading week, I would be remiss not to at least point it out.
Since the rally off the June lows I haven’t witnessed a day where afternoon weakness in the broader market was noteworthy. While yesterday’s afternoon slip wasn’t anything grand either, we did close at the lows of the day. Furthermore, as trading kicked off yesterday morning my screens giggled in green. This however didn’t last long and by mid morning eighty percent of my watch lists were red, which in turn led to a clearly bearish reversals on single name stocks such as MGM Resorts International (MGM), just to point out one.
All in all, yesterday’s price action while lacking energy did have a subtle tone of bearishness to it, which however is not quite yet a reason to get all out bearish on the market. Price action still has lots to prove.
