Stock Market: Steep Rise in 1Q15 Daily Trading Range a Warning Sign

1Q15 Daily Trading Range a Warning SignThe U.S. stock market is a dangerous place to be. It is acting just like it did right before its previous big sell-off. In fact, the daily point trading range of the Dow Jones in the first quarter of 2015 was at its highest level since 2009.

Wild Swings on Stock Market Telling Us Something?

In the first three months of 2015, key stock indices like the Dow Jones Industrial Average were negative. And during the quarter, large daily point swings in the popular stock market averages increased. One day, key stock indices were up big-time, the next day, all the gains were erased.

The table below shows the average point range on the Dow Jones Industrial Average in the first three months of each year since 2006.

Daily Point Range on Dow Jones Industrial Average,
Jan.–Mar. of 2006–2015

Year Average Daily Point Range
2006 90.27
2007 112.29
2008 251.86
2009 233.18
2010 116.12
2011 118.12
2012 109.33
2013 103.89
2014 157.88
2015 209.52

 Data source: Stockcharts.com, last accessed April 1, 2015.

In the first three months of 2015, the average daily trading range on the Dow was 209.52 points—its highest daily point range since 2009 and up more than 32% from 2014! Also notice that in 2006 and 2007 and from 2010 to 2014, the stock market was rising on much lower daily trading ranges. In the years the stock market fell (2008 and 2009), daily trading ranges for the major market indices were much higher. Based on the rise in the daily point trading range, 2015 is looking a lot like 2008 and 2009.

As the chart below shows, despite the ever-increasing daily trading range swings, since the beginning of the year, the Dow Jones Industrial Average has been stuck in a trading range between 17,000 and 18,000.

Dow Jones Indusrtial Average Index

Chart courtesy of www.StockCharts.com

Dismal 1Q15 Earnings Only One of the Problems Facing This Overpriced Stock Market

For the first quarter of 2015, earnings of companies on the key stock indices like the S&P 500 are expected to decline by 4.6% year-over-year. If this number is actually true, then it will be the worst corporate earnings growth figure since 2009! (Source: FactSet, March 27, 2015.) Remember: corporate earnings are the most basic factor behind a stock market. And right now, corporate earnings are suggesting a sell-off is a more likely scenario for stocks than a rally.

False Hope and Optimism Prevails

Despite all this, if you listen to the mainstream financial news, you will hear guest speakers saying key stock indices are heading much higher.

Recently, on a well-known financial news channel, I heard a stock advisor talking about how investors should consider taking a car loan and using that money to buy stocks. Have they gone insane?

I remember back in 2007 when the key stock indices were forming a top. If you talked about being cautious, you were mocked and called wrong. Nobody wanted to hear how risks were increasing in stock prices and how the market was setting up for massive declines.

Tread Lightly On the Stock Market

My skepticism towards the key stock indices continues unabated. To me, it feels like I am back in 2007. Stock market risks are rising, but the vast majority of investors refuse to acknowledge them. I suggest treading lightly with this stock market, dear reader. While I said this through most of 2014, the fact is the Dow Jones Industrial Average is up only 8.5% since the opening of trading in 2014 (15 months ago), flat for 2015, corporate earnings are contracting, and daily trading swings have increased dramatically—all receipts for a major market top.