Still too early to call direction of market

After opening down, the index went on to recover, then fade, then recover, and so on.

For much of the day, the index hovered around 2,635 — its 100-day moving average, an important technical indicator. If it broke sustainably below that average, the bears might have piled on. But late in the day, the bulls staged a rally, propelling the S&P 500 to near 2,700 — about a 1.75-per-cent increase, which on any other day would be kind of hohum.

So what’s next? Was the two-day “correction” (technically, it wasn’t, as the standard definition is a 10-percent decline) a blip in the game flow, or the beginning of the end of the bull dynasty?

Well, I don’t know, and neither do you, and nor do any of the pundits you might be watching on TV. So many forces are at play in today’s stock markets that it’s impossible to parse out all the factors that contribute to declines like we saw on Friday and Monday. For instance, algorithmic trades, which automatically kick in according to pre-set conditions, might have amplified the two-day selloff, as losses triggered further selling; they also might have kicked in to support markets around the 100-day moving average on Tuesday.

Too bad we can’t just ask the robots what’s going on. Short of that, we can make a couple educated observations.

One is that while it is obviously far too early to call the end of the bull market, it is also far too early to call the end of a correction that hasn’t materialized yet. In late August 2015, it took a week for the S&P 500 to drop by 11 per cent, but that decline happened after almost three months of it moving sideways off its May high. The 19-per-cent correction in 2011 played out over five months, punctuated by plenty of peaks and valleys. Pre-recession, three corrections in consecutive years (’97, ’98 and ’99) preceded the dot-com crash of 2000. In short, two days of down markets don’t make a correction; one day of up markets doesn’t mean a correction is over.

The other observation — painfully obvious to investors who were short volatility — is that market uncertainty has returned to the field. The CBOE Volatility Index, aka the VIX, aka the Fear Index, hit 50 for a time on Tuesday after plumbing new lows for a year. That’s the highest volatility since August 2015. It got so wild that several exchange-traded products that bet against volatility — basically, moving inversely to the VIX — had to halt trading; one of them, offered by Credit Suisse, was liquidated.

That won’t matter much to most investors, who probably don’t hold many “leveraged daily inverse VIX short-term exchange-traded notes” in their portfolios. But the return of volatility does suggest they will have to shrug off any lingering complacency and adapt to a market that is looking for a new footing. As bulls and bears duke it out for position and traders place their bets, investing in 2018 might feel more like a roller-coaster ride than a smooth march to victory.

On any given day, either side can win.