Not Bull, Not Bear: Meet the Wolf Market

By KRISTINA PETERSON

'A wolf is clearly a smaller animal than a bull or a bear,' said phrase coiner Michael Purves, 'but it's very quick and decisive.' Here, a tame wolf in the village of Nadbiarezha, north of Minsk, Belarus

NEW YORK—Out of the quest to accurately describe hybrid concepts came the spork, brunch, pluot and mule. One investor's struggle to characterize the U.S. stock market's recent twists and turns led to new market terminology.

Welcome to the "wolf" market.

The wolf market is characterized by a tight trading range, increased volatility, high stock correlations and quick reversals, said its coiner, Michael Purves, chief global strategist and head of derivatives research at BGC Financial. Choppy trading makes it hard to pick stocks based on fundamental qualities, leaving shorter-term options and technical analysis better tools for navigating its bounces, he said.

"I was walking around the block one night and thought, you know, we need another animal," Mr. Purves said. "A wolf is clearly a smaller animal than a bull or a bear, but it's very quick and decisive."

Mr. Purves dates the start of the wolf market to late April although its origins reach further back, he said. In the rally from the March 2008 lows, investors priced in expectations of a faster recovery than has yet materialized. The market has struggled to find direction, balancing the drag from the late spring European sovereign-debt crisis and the recent slew of lackluster economic data with the more encouraging second-quarter earnings. That has left trading trapped in a tight range, subject to sharp ups and downs.

On the bearish side, Mr. Purves doubts the Standard & Poor's 500 index will be able to break above its April high of 1225 by the end of the year. But bulls can point to strong second-quarter earnings and demand from growing economies such as China, keeping a floor around 1010 in the S&P 500, he predicted. Meanwhile, the CBOE Market Volatility index, known as the market's fear gauge is likely to stay elevated between 25 and 35 for longer than normal. The VIX closed Friday at 25.49.

Of course, low volume during August trading has exacerbated market swings. Monday's trading volume was the lowest of the year and isn't likely to substantially increase until September.

"This is a market that's trying to feel its way and it's feeling its way during an extremely slow period in which many folks are out on vacation," said Robert Pavlik, chief market strategist at Banyan Partners. "We've obviously exited the recession, but people are still nervous about the conditions."

With stocks trading closely together as macroeconomic issues dominate the market, investors are relying more heavily on technical analysis, Mr. Purves said. In part, the rise of algorithmic trading already has made the market's moves more closely tied to technical triggers. Also, an environment where interest rates are close to zero makes cash-flow analysis of companies difficult.

"In the absence of something else, technicals loom larger," Mr. Purves said. He also advocates turning to options to make shorter-term bets in a murky market.

The wolf market may be here to stay, at least until the economic recovery accelerates or another catalyst prompts the market to find footing. Mr. Purves believes the wolf market will last into 2011.

"It's going to take a long time to reverse to a classic economic cycle," he said.

Write to Kristina Peterson at kristina.peterson@dowjones.com