Date: May 3, 2017

Looking for Mr. Volatility

Greetings from 39,000 feet as I am on my way home from the west coast. A quick visit in Scottsdale followed by my annual industry trade association conference in San Diego and I cannot wait to get home! If all goes well, that was my last trip to CA this year. It’s just brutal getting there from Hartford these days and the NY airports are a mess and awful to get to.

The Fed concluded their two day meeting today and as expected, interest rates were left alone. Given the recent weak patch in the economic reports, Yellen & Co. would have had a tough time justifying a hike. That should come in June. Normally, one or two of models offer a strong edge today or in the days after a meeting. That was not the case today nor the rest of the week. Stocks behaved as they normally do with a maximum move of plus or minus .50% until 2 PM and then a bigger move. However, it was still very quiet the rest of the day and volatility has all but disappeared, especially in the Dow and S&P 500.

Just look at the last 7 days in the S&P 500 below. Stocks have not only gone nowhere but the daily range from low to high has been historically small.

There’s an old adage that says, volatility compression leads to volatility expansion. It doesn’t say in which direction, however. That means we should be on guard for a larger move in the S&P 500 sooner than later. While the odds favor a move in the same direction as the previous trend, that assumption can be dangerous to your portfolio. If the upside and the bulls are to win out, they will need the S&P 400 and Russell 2000 to get back in gear and at least equally perform. Both indices have been big laggards of late.

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Paul Schatz, President, Heritage Capital