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The S & P 500 (SPX, below) is exhibiting very low volatility and congregating around its 20-day moving average. This is a classic chart formation, especially when you throw in the shrinking Bollinger Bands. And it means that the market is getting ready to move in a big way. The problem is that you can’t tell the direction.
Chart Courtesy of StockCharts.com
A similar picture, low volatility and shrinking Bollinger Bands is seen in the CBOE Volatility Index (VIX, below). When VIX shows this kind of activity, especially when the market's moves start to be constrained to a very narrow trading range, it confirms that a big move is coming.
Chart Courtesy of StockCharts.com
There are some factors, though, that could influence the way the market moves in the next few days. So, let’s look at a few potential catalysts.
The end of the month is almost here. That means that for the period starting on April 30 to May 5th, the market will have a tendency toward rallying. This is the time when new pension and long term institutional money comes into the market. In the current market, value players have been clearly buying stocks, keeping the market from falling apart and forming a consolidation pattern.
The Fed is meeting and will have a statement sometime Wednesday afternoon. That could be a positive influence since the central bank has no interest in causing any significant market turmoil. Still, one can never be sure until the statement is released and the market reacts.
There are still some earnings news to come out. Surprises have been taken with a grain of salt, though, since the market had ratcheted down expectations ahead of the reporting season.
And while the above catalog of potential movers is essentially positive, there are also lots of potential negatives out there. This is a more nebulous set of potential market movers, given the fact that many of them are highly speculative and hypothetical. Nevertheless, they are there and should be included.
Senator Arlen Specter switched parties. That gives the Democrats a lot of wiggle room as they try to advance their political agenda. Specter is being touted as the "60th vote" for the Democrats, presumably giving them a filibuster proof majority. Still, Specter is fickle, and his voting record was far from being conservative when he was a Republican. This one's in the realm of being on the edge of Chaos, where anything is possible, and of course being predictably unpredictable. Only one thing is certain, Specter's votes are going to come with lots of strings attached and could have lots of unintended consequences for the Democrats, and likely the Republicans.
The swine flu could spin out of control or fizzle. Again, this one is likely to be a volatile influence. One related death has now been confirmed in Texas, a piece of news that will get lots of attention.
The Taliban are advancing in Pakistan. Pakistan has a fully functional nuclear arsenal. Still, Pakistan seems to have gotten the message and has now begun an offensive against the Taliban. According to Stratfor.com: "The move stems from a growing sense within the army and the government that the line must be drawn somewhere, beyond which the jihadists cannot be allowed to advance. But despite this apparent strengthening of political will, the issue remains very much a question of capability." You can fill in the blanks here.
Iran is still out there doing that stuff that Iran does and Iraq is becoming increasingly volatile. This region of the world had been somewhat quiet lately. But any significant flaring up of activity here could provide some negative influences to the mix.
There is another aspect to consider here, the effects on Mexico's security. Mexico is currently under siege, as it finds itself in the midst of an increasingly aggressive drug war. This means that many of its resources, including the military are deployed in multiple areas of the country, involved in a mission that is crucial to national security.
Should this situation unravel to the point where the military has to be redeployed, it could have significant consequences. Stratfor.com summarizes the situation succinctly: "A massive public health response would likely involve military and federal law enforcement resources that are currently deployed around the country on counternarcotics and public security missions. Should the outbreak escalate to the extent that authorities implement further emergency procedures such as crowd control on a large scale, it would likely require a significant reassignment of these resources, which have been stretched thin as they have struggled to deal with the country’s already deteriorated security situation. In addition, the country’s already weak military could be affected particularly hard if its members are sharing close quarters in barracks."
Here's a grim summary of the drug war in Mexico. According to Stratfor.com: "The number of organized crime-related homicides in Mexico during 2009 surpassed 2,000 this past week, representing a higher rate over the same period last year, when it took nearly seven months to reach 2,000. Despite recent declines in violence associated with the increased security presence in Ciudad Juarez and the rest of Chihuahua state, it is important to recognize that overall violence during the first four months of the year is occurring at the similar rates as during much of 2008 — a record year in terms of drug violence. "
Conclusion
When volatility slows it means that the market is about to move. Think of this kind of action as a coil that is starting to wind tightly around a pivot point. The tighter the coil, the more likely that it will eventually snap and start to expand. The winding of the coil is a process of energy storage. When the coil unwinds, the energy is released and the market moves.
In other words, the market is preparing for something to happen. And that’s why the S & P 500 and the VIX charts are showing signs suggesting some kind of a big move.
Support for the S & P 500 is somewhere near 800, while resistance is above 875. Moves above or below those key chart points are likely to travel at least another 5% beyond these areas, in the short term. Anything beyond that would depend on how much of a buyer or seller stampede hits the market in response to the move.
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