Why Tape Action Is Worrisome For Those Attempting To Manage Risk

Are we having fun yet? If you are someone who attempts to manage risk and/or play the trends in the market the answer is likely a resounding, NO!

What's the problem, you ask? The short answer is the price action has been more than a little nutty lately as the market has been moving sideways (and violently so), changing directions as many times as the Patriots change out footballs.

Here's what we mean. In 2014, 14 changes were counted (give or take a couple) in the direction of the trend for the year - with some waffling in between at times, of course. And it was this high number of direction changes that caused many active managers (including the vast majority of hedge funds) to struggle with performance last year.

However, with less than a month under our belts in 2015, active managers couldn't be blamed if they began pining for the good ol' days of 2014. The problem is that since the beginning of December, there have been seven changes in direction - with no waffling whatsoever - as stocks have been moving either straight up or straight down for two straight months now.

S&P 500 SPY - Daily

Of course, it would be easy to blame the schizophrenic behavior on the fast-money types and their high-speed trading computers that seem to push the indices here and there, each and every day, at the drop of a hat.

Related Link: Making Sense Of The Increase In Volatility

However, the key point to this morning's missive is that there just might be something else happening here. And if we are correct in this assessment, investors will want to be on their toes in the coming days/weeks.

"Bad Action"

Let's take a closer look at some of the "market action" seen recently. On December 16, it looked like the market was ready to break down in a meaningful way. Oil was crashing in spectacular fashion and analysts were busy telling us why this was a bad thing for the banks, emerging markets, jobs, and global growth.

But as had been the case for quite some time now, the talk about Super Mario doing a QE deal caused traders to put aside their fears and instead bask in the glow of what would soon be another trillion dollars looking for a home.

The problem is that while the rally (labeled #2 on the chart) did manage to make a new high, the fun and games didn't last long. Then on December 30, things started to go the other way. And before you could put away your New Year's Eve garb, trend change #3 was at hand.

During trend changes #4 and #5, oil was once again the focal point. Well, in between worries about Russia, Greece and the U.S. economic data that is.

But on January 16, word leaked out that the ECB wasn't going to disappoint and that Super Mario would actually fire the much ballyhooed bazooka that he'd been going on about for the better part of a couple years. Sure enough, the news of the next great money-printing experiment caused traders to celebrate (i.e. trend change #6) once again. The problem was that the QE celebration lasted for a grand total of four days.

This time there was no new all-time high. This time investors didn't fall all over themselves to get on board the bull train. Nope, this time, the trend changed (#7, of course) on a dime as new concerns surfaced regarding the state of the U.S. economy, the impact of crude's rude move on blue chip earnings, and Greece... Yes, Greece... Again.

And We're Back...

Should we REALLY be worried about Greece, their banks, and what it might do to the European Union again? Haven't we been through this before? Wasn't the European debt mess declared solved in 2012?

Apparently not. You see, even the Federal Reserve has now added the potential for "international developments" to their list of things to keep an eye on. And since Janet Yellen and her merry band of central bankers are pretty darn picky about the choice of words they use in their FOMC statements, the thinking is that there just might be something bad happening in the banking system across the pond.

And then, just when you thought oil was stabilizing, WTI futures broke to a fresh new low on Wednesday. According to official reports, there appears to be a whole lot more oil floating around these days than had been previously though. And increased stockpiles of Texas Tea is not what the oil bulls wanted/needed to see on Wednesday.

Related Link: Is It Time To Rethink Your Investment Strategy?

So, with the Fed worrying about Europe, the new Greek government talking trash to Germany, and oil continuing to crater, not even a blow-out quarter from Apple could keep prices from falling apart yesterday afternoon.

Sure, things could easily turn around, maybe even today. And the bulls tell us that the 150-day moving, which currently sits at 1996 and has held like a champ over the past month and a half, is likely to be the bottom again. So, maybe trend change #8 will begin right here, right now and the day will once again be saved.

However, the bottom line is the tape action has been anything but strong lately. In fact, it's been pretty rotten. And because of this, some caution might be warranted in the coming days. Yes, you are correct... Managing risk has been a waste of time and money over the past couple years. And, Wednesday did feel a little overdone.

But if the tape action doesn't improve in a meaningful way, investors may soon need to start looking over their shoulders to see if something furry is lumbering their way.