Sunday, February 01, 2015

Market Volatility Is No Cause for Panic

"Volatility" has been the daily buzzword in the market for at least the last six weeks.  Certainly we've seen some wild and wooly daily swings, as traders on both sides of the pond react to seemingly random bits of news.  If we take a step back to look at the Dow Industrial's weekly chart, though, we can plainly see that there's no real panic in the market, nor is there any real sense of troubled times ahead for 2015.  Take a look at this chart:

Dow Industrial Average Weekly Chart
A few things should pop right out as us:
  1. The Dow is trading well above its 250-period moving average (Green line).
  2. The Dow is trading above its 50-period exponential moving average (Red line.)
  3. The slope of both the 50-period and the 250 period averages is at a consistent upward (bullish) angle.
  4. The 50-period line has been acting as support since late 2011.
  5. Resistance - the green line - is proceeding upward at a very healthy slope and - since January 2014 - has been running parallel to the 50-period line.
  6. Volume has been relatively stable since late 2013 and is not showing any of the wild increases that would signal a trend change.
  7. We're trading at a support level right now (top dashed blue line) and there is a very strong support level around 16,500, coinciding with a 23.6% Fibonacci retracement line.
  8. The weekly chart is still experiencing higher highs and higher lows.  That is the textbook definition of an uptrend.
Will there be more downward movement in the next week or so?  Sure.  There are plenty of global pressures out there pushing us downward, and I expect us to at least test the 50-period average around 16,900.  That point, however will be a fantastic buying opportunity. If the resistance trend line continues, the next test of that resistance may be above 18,500.

Now, there's certainly plenty of headwind in the global market.
  • Greece is in a staring contest with the ECB and with Germany over what to do with their debt.
  • Russia's economy is in meltdown.
  • Europe's economy has slowed to a point hovering just above a recession.
  • China's GDP, while still a very healthy 6.7%, has slowed considerably.
  • The Middle East, Africa, and Latin America are all stalled.
  • The US Dollar continues to strengthen against other key currencies.
  • A labor dispute at the ports on the US west coast is hampering imports that should otherwise be soaring.
  • The collapse of oil prices is starting to put pressure on numerous industries, threatening the growth in the otherwise healthy US economy.
Despite all that headwind, where else would investors put their money?  The US Treasury is always a safe haven, but with interest rates still near zero and not likely to increase until late 3Q15 there's no real profit to be made there.  The European treasuries aren't paying anything either.  Russia's bonds are paying double digits right now, but it's anyone's guess if you'll ever see your investment again.  European stocks are in turmoil as is the Japanese market. Where else will that money go?  As global conditions worsen, expect the US equities market to become the safe haven. 

Take advantage of these downturns in the Dow, the S&P, and the Nasdaq.  They represent the best buying opportunities we've had in a while.  Don't fear this growing volatility; embrace it.  Every dip in prices in the coming weeks is your opportunity to enter this still healthy and still growing bull market without paying too high a premium.  This bull has not yet run its course, nor do I expect it to end in 2015.

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