Earlier in the month we wrote about the “August doldrums”- the sense that this month the markets have been, well, boring. Even taking into account the historically low activity in August, the lack of volume has been surprising. We aren’t the only ones to notice. But even the low volume doesn’t fully capture what we’re witnessing – the markets just aren’t going anywhere. The S&P 500 has been remarkably range bound, reflected by the lowest average daily true range of 2012:
S&P 500 E-mini Front-Month Futures Contract
*Through August 29. Disclaimer: past performance is not necessarily indicative of future results.
This August has been dull by historical standards, but it has seemed even starker in a year dominated by headline-driven ups and downs. The risk on/risk off trading environment of 2011 has followed us into 2012 – and when market correlations are high, the choice for investors increasingly boils down to “in or out?” And the answer for many this August, it seems, is “out.”
Neither the bulls nor the bears seem to have much conviction – and investors are content to sit on the sidelines for the most hated rally in recent memory. So what is everyone waiting for? Jackson Hole? The Troika report? The fiscal cliff? Rampant speculation about looming, potentially huge macro-economic bombs led to huge swings in the market earlier this year… but now all it musters is crickets.
In our view, the last year of the risk on/risk off see-saw has fostered a sense of weariness. Rumors and speculation can only swing the market so many times in a given period of time before those rumors start to lose their effect. Whether this is all to the good or not remains to be seen – we may still see extreme risk on/risk off swings once we get a concrete sense of what’s happening with QE3, the future of the Euro, or the fiscal cliff. But maybe, just maybe, the markets will stop swinging wildly on the rumors, and wait… to swing wildly on the facts.