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As Volatility Dies, This New Trade Rises…

No more distractions…

I’m tired of earnings announcements and Tesla gossip. It’s time to push past these market sideshows and get down to business.

The major averages were mostly flat yesterday as the S&P 500 hovers near new all-time highs. LPL Research’s Ryan Detrick notes that yesterday marked the third smallest intraday range of the year for the S&P. But it wasn’t even the smallest range of the week (that title belongs to Tuesday trading).

With stocks stuck in neutral this week, volatility is sinking to levels we haven’t seen since the January melt-up rally.

Volatility

The action (or rather, lack of action) we’re seeing in the markets this week is a far cry from the volatility explosion during the first quarter that led to a quick 10% correction in the major averages.

After the winter selloff slammed stocks, the easy “steady grind” trading days of 2017 disappeared. A surge in whipsaw trading marked the end of one of the least-volatile periods in market history — and the newfound volatility didn’t disappear after stocks halted their slide in early February. Another massive volatility surge punctuated the end of first quarter trading as the VIX spiked more than 30% in one day in late March.

After more than a month of consolidation following February’s eye-popping volatility spike, traders were treated to an encore. In fact, the VIX experienced six days during the first quarter that saw a rise of at least 20%, and one session that experienced a 20% drop, MarketWatch notes. That marked the most 20% moves for the VIX during a single calendar year since 2014.

Since those spikes earlier this year, we haven’t seen much action from the VIX. In fact, July’s little tech earnings scare that sent Facebook tumbling 20% barely even registered.

Now we find ourselves in the summer trading doldrums. Volatility is beaten to a pulp. The market’s little moves higher and lower aren’t showing any follow-through. A little patience will go a long way in this type of environment. We’ll need to give our trades some time to shape up.

Speaking of trades, we’ve been stalking the semiconductor sector for a breakout above its July range this week. On Monday, I noted the VanEck Vectors Semiconductor ETF (NYSE:SMH) was closing in on a breakout of $108 — a move that would set the chip makers up for a run to the upper end of this year’s choppy range.

We’re seeing some decent follow-through on this breakout as the trading week progresses. We ditched our semi trades back in June after the group went from knocking on the door to new all-time highs to diving below its 200-day moving average. But these stocks are beginning to get their act together and outperform after taking a quick summer vacation.

Sincerely,

Greg Guenthner

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Greg Guenthner

Greg Guenthner, CMT, is the editor of The Rude Awakening Pro, The Seven Figure Formula and Seven Figure Signals. Over the past decade, Greg has helped build the small-cap and technical research teams. His analysis has appeared in Forbes, Yahoo Finance, Bankrate, and countless other publications. Greg is a member of the CMT...

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