Some very credible indicators are signaling that we may be ready for a rebound. Volatility for the SP500, as measured by the VIX indicator, increased 25.36% in April and 73.92% in May.
On the surface, the big increases seem to have been caused by uncertainty surrounding European sovereign debt and the still unresolved oil spill in the Gulf. Both issues have contributed to high anxiety on the part of traders. As longer term investors, we’re a bit less concerned with the daily volatility.
The 99.27 % two month increase in the VIX is the 3rd biggest increase on record since January 1990. Both prior spikes (August 1998 and October 2008) occurred during market declines that were followed by big upturns. On May 20th, the percentage of SP500 constituents trading above their 50 Day Moving average had declined to only 6%, indicating a significantly oversold stock market.
Although the Gulf, Europe and other big concerns have again confronted the stock markets with a very high wall of worry, there are indications that the U.S. economy continues to gather momentum. As bad as the oil spill is, British Petroleum appears to have the resources to pay for the damage.
Since inflation remains tame, Fed Chairman Bernanke still has maneuvering room to focus monetary policy on preventing a double dip recession. Add it up and I think the economy will continue to recover, and the stock market will again begin to work its way higher.
– Dan
What’s Next for the Stock Markets?
Thursday, June 3, 2010