Once again, the week closed with a big move on Friday, but this week it was a down move. Analysts attributed the day's drop to riots in Spain, but it is also likely that a slowing U.S. economy has something to do with the stock market weakness. Watch for more downside risk in the week ahead.
S&P 500 Volatility Still Points to Decline
Almost 60% of companies that reported second-quarter earnings so far have missed revenue projections. Analysts see soft sales growth for at least the next two quarters. Earnings require sales, and if the current trend continues as expected, stocks should suffer a significant decline by the end of the year.
I'm bearish on stocks, but some would argue the market is moving higher and that must be bullish. My counterargument is simply that I'm early. This can be a dangerous position, but history is on my side and volatility shows us that the next major move in the S&P 500 will be to the downside.
Some traders use the CBOE Volatility Index (CBOE: VIX) as a way to measure market volatility. This index spikes higher on market declines and can offer timely buy signals. There are a number of trading strategies that can be developed with VIX, and I'll cover some in the future. For now, I want to look at another measure of volatility that has correctly forecast 100% of the market's drops in the past five years and offered timely entries at the end of the decline: the Average True Range (ATR). (more)
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