After several very quiet weeks in the stock market this is a quick heads-up to expect a significant pick up in volatility over the coming days.  If it gets violent, as it has several times in the recent past, rest assured it doesn’t affect Hedgehog in the same way that investments with a directional bias can get hurt.

Once again the market is at a critical juncture and hanging on by its fingernails.   We have been watching the 1997 lows over the last couple of weeks as this is the last significant area of support.  Below this there is plenty of room for the bear market to accelerate.  Yesterday the S&P 500 closed at 735, its lowest close in 12 years and right on top of this key support level.  Meanwhile the Dow Jones, shown below, has just a few more points left before it reaches its equivalent low.  So we are at or extremely close to this critical support level.  You can see in this chart how February has now closed below the previous support level that the market had held six times previously, bring this 1997 low into play.

The prognosis is exactly the same as when the S&P approached that 1200 level a few months ago.  Either we will see a violent rally from this level as shorts cover and bargain hunters go on a buying rampage, or we knife straight through and accelerate down as the next leg of the bear market gets underway.  There is no way of knowing which way it will go until it unfolds, but either way the action can be expected to be swift.  Simply hanging around casually in this area for a long period of time is extremely unlikely.

You may recall when the S&P was at the 1200 level we actually witnessed both outcomes as first the buying frenzy drove the market up an amazing 14% in a couple of days and then when the buyers were all spent out the market collapsed and accelerated down at the start of the move that brought us down to where we are today.  Could we see the same again perhaps, or will it just be a clean single move?  We’ll find out very soon.

Those who like statistics may be interested to know that the Dow Jones ended February down for the sixth consecutive month – the first time this has been witnessed since 1942!  It is also worth remembering that by implication January was also a down close.  Many members will be familiar with the statistical significance of January closing down.  For newcomers we will recap the January effect and the amazing statistics behind it in a future newsletter.

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