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Tomi Kilgore
April 15, 2010, 12:01 a.m. EDT · Recommend · Post:
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By Tomi Kilgore
NEW YORK (MarketWatch) -- The stock market seems a little too quiet to be near a significant peak.
When trends turn, it's usually after a period of increasing volatility, marked by spikes, drops and sharp intraday reversals. Both bulls and bears have a strong enough conviction to battle it out until one side is forced to capitulate. And that's certainly not the case at the moment.
The CBOE Market Volatility Index's /quotes/comstock/20m!i:vix (VIX 15.59, -0.61, -3.77%) slide to near three-year lows this week is more representative of a lack of conviction in either direction than just complacency. Investors may not be scared enough of an imminent sell-off to be buying put options [buying options requires "buying" volatility], but that doesn't necessarily make the market vulnerable to correction. For the contrarian argument to work, there also has to be a strong enough belief in the upside for investors to be buying up call options, which would also help support volatility pricing.
Apple on Wednesday said it will delay selling the iPad overseas by one month, until the end of May, because of surprisingly strong U.S. demand. Stacey Delo discusses with MarketWatch's Dan Gallagher and Barron's Bob O'Brien.
In December 2006, the VIX was falling to decade lows below 10, and the Dow Jones Industrial Average's /quotes/comstock/10w!i:dji/delayed (INDU 11,123, +103.69, +0.94%) intraday trading range averaged 82.02 points per session, with only 4 of 20 trading days witnessing triple-digit ranges. The Dow eventually pulled back, but not until February 2007. The decline lasted less than a month, with the Dow losing just 6.6%, before another rally started.
When the Dow topped out at an all-time intraday high of 14198.10 on Oct. 11, 2007, the VIX had been trending higher for nearly a year until it had just about doubled off the December 2006 low. In the two months leading up to the high, the average intraday trading range widened to 168.30 points, with triple-digit ranges in 33 of 43 sessions, while the Dow rose 7.2%.
Meanwhile, the VIX hit a low of 15.23 earlier this week, the lowest level seen since July 2007 and well below the Oct. 11, 2007 close of 18.88. The Dow's average daily trading range over the last month has been 82.87 points, with triple-digit ranges in only 6 of the last 22 sessions. That looks a lot more like what was happening in December 2006 than in September-October 2007.
It wouldn't be a surprise if the market weakened because overall first-quarter results could only match high investor expectations. But given the lack of conviction among investors, any weakness isn't likely to result in anything more than a short and shallow pullback.
At least not until the VIX bottoms and volatility starts picking up.
Tomi Kilgore writes Taking Stock, a global column that gives insightful analysis about equity-related topics around the world. This column originally appeared on Dow Jones Newswires.
Apple Inc. got a boost from its announced shortage of the iPad, but was the shortage planned from the beginning?
3:21 p.m. April 14, 2010 | Comments: 23
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