There is a really simple concept that all investors need to grasp about price: long-term bull markets accelerate on volatility contraction and die on volatility expansion.
There is an elegant theory behind this phenomenon that is extraordinarily simple: volatility contractions signal orderly, planned, sophisticated buying. It's a signal that large bidders are beneath the market picking and choosing spots to accumulate equities. If you've ever traded size in a security, bidding for days and possibly weeks on end, you can witness this phenomenon for yourself. Volatility contracts as your bids stabilize the market.
Volatility expansion on the other hand is the complete opposite of this. Markets top on expansionary, violent moves because it signals unorganized desperation to get in at any price. It is a sign that the last of the holdouts are simply throwing up their hands, screaming "get me in at any price." At the same time, shorts are forced to cover. What happens to the market in this type of scenario is that it gets hollowed out to an extent, becoming susceptible to future volatility in the opposite direction of the primary trend.
Bringing us to the here and now. This market continues to be a practice in absolute price perfection. Volatility continues to contract on all the major indices right as the S&P 500 is flirting with a breach of a very important price point in the 3000 range. Individual sectors are practicing rotating corrections with one sector taking over on the upside right in time for another to take a rest, again, aiding in the overall contraction in overall volatility for the general markets.
Perhaps most important of all is the fact that there remains a significant portion of assets that do not have nearly the equity exposure necessary given how far the market has advanced this year and how much better the economy is than advertised. These are latent bids in the market that will be forced to participate as the year wears on.
The catalyst for these latent bids to come to life is very simply sand shifting through the hourglass as the calendar year wears on. The progressive tightening of the noose around the respective necks of the asset management community will only grow in intensity.
Past September and past S&P 3100, there is not going to be a single reason in the world, apart from an iron clad investment mandate forcing the action, for an asset manager to be accepting of a 2% return in a fixed income instrument. Not a single one.
In the meantime, the market isn't going to allow these latent bids to get in cheaply or comfortably. In typical financial market fashion, the path of least resistance will be maximum discomfort for those who want the comfort of continued employment.
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