Increasing Volatility: Prelude To a Crash?

[hvactec]

Submitted by Charles Hugh Smith from Of Two Minds

Increasing Volatility: Prelude To a Crash?

The megaphone pattern in the U.S. stock market typically presages a major decline or full-blown crash.

Market observers have long noted that increasing volatility presages market crashes. If you glance at a chart of September-October 1929, just before the crash that started the Great Depression, you will note the same sort of manic swings of euphoria and fear that have characterized the U.S. stock market over the past few months.

Not only are the swings increasing in amplitude, the time between each move up or down is decreasing. Think of a series of wind storms that grow increasingly more violent even as the time between storms diminishes.

In stock charts, this widening of range traces out a megaphone pattern. The S&P 500 (SPX) has traced out a classic megaphone pattern over the past few months:

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Note the eleven wild swings up and down in a mere two months. Does anyone seriously believe this sort of schizophrenia typifies a healthy Bull market?

From a technical point of view, the recent euphoric three-week rally is nothing but a last-gasp attempt to regain the critical 200-day moving average (MA), another classic sign of a market about to roll over big-time.

On the weekly chart, we can clearly see how the timespan between official "fixes" and renewed declines has shrunk from six months from the first "fix" in May 2010 to two days after the last "grand fix." Market participants are losing faith in the Status Quo's ability to effect a coherent, lasting "fix," especially as the rules governing hedges such as CDS are changed at will.

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[conner700]

Although I generally like CNBC reporters, yesterday they were saying something along the lines that the swings were the new normal. I felt this statement--insulted home viewers intelligence. As if we are to accept these "manic" swings in the market as nothing to be concerned about.

Today the market is up about 100 points and other news stations---say the market has bounced back from yesterday. It is apparent that some people can't do simple addition and subtraction.

I contend that until the market shows steady slow growth over a period of six months without huge sell off--the market is going to fall to November 2008 levels.

It has been reported that MF Global took clients money and bet it agaist 44 to 1 odds when they purchased Euro bonds---and lost. Where were the regulators?? What is going on?