FX Evolution: Has the Stock Market Flashed a Warning Signal?
January has proven a slow month for the market. But there may be some weakness in the weeks ahead. That’s due to a variety of factors, including the strength of the market’s bull run heading into the end of last year.
The overall moves in the market point to some short-term weakness. Should that clear up, investors will be able to see a resumption of the longer-term bull market.
One warning signal right now is that market volatility has been historically on the low side. Even with some down days, the volatility index, or VIX, has barely inched higher to 15 at its recent peak. A reading between 15-20 is fairly normal.
When the VIX is trading lower, it’s a sign that markets may be too complacent. That could lead to a sudden 3-5 percent pullback.
While markets had a bit more volatility going into the monthly options expiration this week, investors may be in for a more turbulent few weeks.
For long-term investors, any pullback here will likely be little more than a speed bump. For those using leverage or trading, the ideal strategy may be to reduce trades until volatility ticks higher.
A warning signal doesn’t necessarily mean a bear market is around the corner. But markets remain a bit too complacent, even after slowing down significantly in recent weeks.