Since the markets have pushed back into record territory at the very end of September, market volatility has dropped dramatically. For the last eight or so trading sessions, the has often been in a narrow 10-point trading range.
These flattish/slightly up days may not be exciting, but they are great news for the bulls. Think about it: When was the last time we were down one percent? Way back on October 13. If this is what passes for consolidation, this is pretty good.
This "green light for risk" comes with a number of caveats:
First: Traders seem willing to ignore weakness in Europe as long as ECB head Mario Draghi is strong--specifically, that Draghi will not be thwarted by Germans or others who do not want him to expand the stimulus program.
In other words, belief in the "Draghi put" is very much alive. If Draghi's influence is curtailed, markets in Europe and the U.S. are likely to react negatively.
Second: Three of the main issues that had traders concerned in October (Isis, Ebola and Ukraine), do not suddenly re-materialize as issues.
There's one other problem: Now that the market is at new highs, much of it is fairly priced or overbought.
All the major indices--the Dow Transports and Industrials, the S&P 500, the Russell 2000, and theNASDAQ Composite--are in overbought territory.
That's why consolidation...moving sideways...is so important. It works off overbought indices, sectors, and stocks.
You do not want the stock market to go up one percent every day. That creates rapid pullbacks as traders quickly seek to consolidate profits on the first sign of weakness.
On the flip side, there's very few bargains out there. I've talked about gold and gold stocks (GDX)which are way oversold, but even here they are off their lows. A number of commodity plays are also oversold, including Freeport-McMoRan (FCX), just off a 52-week low.
What else? How about Twitter (TWTR), a miserable performer all year.
Finally, the most oversold sector is...volatility! The CBOE Volatility Index (VIX) has been pathetic recently, threatening to drop below 12 several times in the last few days.