Schaeffer's Trading Floor Blog

Will the Market Chop Ever End?

Analyzing the wishy-washy price action of the S&P 500

by 5/2/2014 7:32 AM
Stocks quoted in this article:

Looks like we can pretty much all agree that the first third of 2014 has provided us one big churn into nowhere. It's even choppier than I thought. As our own Ryan Detrick points out, the S&P 500 Index (SPX) has alternated up and down weeks for eight straight weeks. It's a phenomenon that last happened in 2006, and before that 1998, so clearly eight is some sort of magical number.

And the best (worst) part? History suggests that once we Start Choppin', we keep chopping. Ryan runs some charts, and concludes this:

The longer-term results aren't very impressive, with just a +4.8% average return a year later -- also up just a coin flip. I came into 2014 bullish, but I've changed my tune over the past six weeks to looking for a more choppy environment. Remember, as traders we are allowed to change our views.

I'd say I started the year a bit bullish too, then I started thinking it was a bit of a 2005 replay. Michael Santoli hits the nail on the head here:

The market spent 2005 digesting a rapid advance that began more than two years earlier, at the bottom of the tech-bust bear market. By year-end 2004, the S&P had gained 52% over the prior 28 months. The index finished 2013 at the 1,848 level, having risen 63% over 28 months, dating back to the time of its last double-digit drop (of about 19%) in mid-2011.

… The hefty gains in a short period of time entering 2005 had stoked animal spirits enough that some feared a "new tech bubble" had emerged, led by Google Inc. (GOOGL, GOOG), which went public in August 2004 and saw its stock triple by the spring. The Economist headlined an article "The Echo of a Boom?" in June 2005, just as early this year articles warning of a "New Tech Bubble" proliferated.

In both years, overheated tech stocks pulled back hard, falling 12% by Memorial Day, even as the broad market held relatively steady. Small-cap stocks also underperformed in the first part of 2005, as they have so far this year. Also, in both years, sloppily exited crowded trades caused air-pocket declines and rising anxiety.

(Just ignore that "Adam Warner" guy he mentions in the middle of the article.)

History never completely repeats. We're talking one or two data points. We're certainly at a similar stage of the market cycle now as we were in 2005. The market improved as 2005 went on, but I just started this piece agreeing with Ryan's point that there's no particular sign this chop ends any time soon.

So I'll try to middle myself here, and say it's 2005 Lite ... we go slightly higher … slowly and choppily. I haven't traded actively in a few years now. In 2013, I was patting myself on the back for that; I only would have gotten in my own way. In 2014, I feel the opposite, as there were opportunities to fade moves and sell options premiums. I passed on almost all of them. If I start up again, I will advise, because I'll be a contra-tell and the trend move is coming!

Here's my one more definitive call: The Tuesday Rally trade will stop working. It's getting more and more publicity … not to mention there's really no history there or particular reason it should continue. Maybe not next week or the week after, but over time it will mean-revert.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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