What is going on with the stock market? That is the common question going around both Wall Street and Main Street right now. If you've watched the evening news any in the past week you have no doubt seen stories about the huge drop in the Dow Jones, NASDAQ, and S&P 500 averages last week. Credit fears, especially in the subprime area have driven the decline.
While credit fears and the hedge fund fallout at Bear Stearns and other investment brokerages certainly give investors a reason to sell, is that really the only thing causing this sudden drop? I am in the camp that says no to this question. It is late summer now, a time that has never typically been a particularly strong time for stocks. Stocks have had a great run and volatility had been low. More vacations by traders and managers, market jitters, and the huge bull run the markets have had are all reasons to let the market come in a little bit.
When looking at a market roundup earlier tonight I found an interesting article written by Liz Rappaport at TheStreet.com. The article speaks of the rise in the CBOE Market Volatility Index, also known as the VIX. The VIX spiked to 26.21 earlier in the day, its highest level in 4 years. This is generally seen as a contrarian indicator, meaning that a rise in the volatility index is a positive for stocks since investors are becoming more worried.
Also, from the article we see that the Market Vane market Bullish Consensus data dropped to 54% for the week ending July 31, its second lowest reading in 4 years. Again, this figure is seen as bullish by most since it reflects pessimism in the market. Volatility is certainly back in a big way, and some of these indicators are even trying to signal a turnaround could come, but there are still subprime fears that will not quit, and this is not a good time of year for stocks. Which way will the market go short term? I don't know, but I certainly wouldn't expect the volatility to drop anytime soon.
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