Stock market volatility is like a roller coaster of extreme highs and lows. However, unlike the thrill-loving roller coaster riders who often get up from their seats smiling, investors often walk away frowning. This is because the excessive volatility following a rally in stocks often ends up in much lower prices. At the same time, many investors – even professionals – do not expect a jump in volatility right now.
Indeed, on January 15, the San Diego Union-Tribune newspaper asked a senior director of a financial advisory firm, “Will 2021 be a volatile year for the stock market?” He replied: NO: If 2020 weren’t a year of volatility in stock indices – with pandemic, recession, elections and unrest – then it’s reasonable to expect 2021 to be relatively stable.
However, a key stock market indicator is showing. Here are the takeaways from our US Short Term Update for January 15th:The top chart shows the DJIA and the bottom chart shows the CBOE Volatility Index (VIX). We have reversed the VIX scale to match stock prices. This index measures investors’ expectations of market volatility over the next 30 days. In most cases, the VIX moves and reverses with the stock. When behavior changes, it’s time to keep a close eye on stocks and the VIX. The most recent VIX intraday low occurred on November 27 at 19.51. Since then, the DJIA has made a series of higher highs and the VIX has made a series of higher lows. This divergence is indicated on the chart by a red trend line.
In our January 15 short-term report, we describe the “key” to determining when volatility might start to rise. In addition, subscribers are provided with DJIA Elliott Wave markings, which provide even greater precision in determining when to expect a market change.
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