Lower Volatility is Key

After the move in the market this past week, the big question for investors is whether the market has undergone a sustained change in character. Has the bear market ended, at least for now? Is the market going to move higher?

Investors have some good news and a number of strong fundamental arguments to support the recent rally. This week, the accounting standards board made some changes in the mark-to-market accounting rules and optimism that the G-20 economic conference may actually be a bit ahead of the curve in addressing some of our most pressing problems is a big positive.
Probably the biggest potential fundamental positive is all the stimulus money and liquidity that is being plowed into the economy over the past few months. As of April 1st, most Americans will be seeing an extra few dollars in their paychecks each week with the changes in withholding tax.

The big problem we face is that after a quick move up off the March lows and the fast and furious action of the past week, we have a lot investors acting on emotion again. Most folks are worried about being left out and missing a big move, after wanting out just a few short months ago. It doesn't help when so many market pundits have called "the bottom."

It presents a real conundrum for any prudent investor who has seen big swings in the market over very short periods of time. The market was down over 20% in just 18 days in Feb/Mar and is now up roughly 20% in the last 18 days. Volatility is extremely high as uncertainty still lingers. This poses a problem for investors who are looking to build longer term positions in the markets.
Once again the market is at a particularly interesting juncture as earnings season starts in earnest. We should hear plenty of comments in the next few weeks about how the economy is affecting business. That won't necessarily send us lower, but the recent rally is going to increase expectations, and that will make for more volatility.

Institutions have been stepping into the markets the last few weeks, as this is why the markets have snapped back after down days. This is a positive sign and hopefully it continues. However, the volatility and daily swings are something institutions need to see less of if we are to see real sustained buying.