The stock market’s fear gauge spikes the most since February as the S&P 500 tests a crucial technical level

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A trader works during the Fed rate announcement on the floor at the New York Stock Exchange (NYSE) in New York, U.S., March 20, 2019.

A 2% decline in the stock market on Monday sent Wall Street’s fear gauge soaring the most since February as investors grow concerned about the spread of COVID-19’s Delta variant.

The Volatility Index, also known as the VIX, soared as much as 34% on Monday to above the key 20 level, which is often monitored by CTA and Quant funds as to when to add or remove leverage from their portfolio and in-turn buy or sell stocks. Monday’s move in the VIX failed to outpace the fear gauge’s 46% surge on February 25.

The move higher in volatility comes as the S&P 500 tests a crucial technical support level that could determine the future direction of stock prices. The stock market’s 50-day moving average stood at 4,239, just below the S&P 500’s price of 4,242 at time of publication.

Moving averages are a lagging trend-following indicator that technical analysts use to smooth out price movements and help identify the direction of the current trend in place.

Traders view the the 50-day moving average, which is the average daily closing price of a stock over its previous 50 trading sessions, as a short-term moving average that often represents areas of support or resistance for a security.

If the stock market notches decisive and consecutive daily closes below the 50-day moving average, investors will likely look to the 200-day moving average as the next key support level. The 200-day moving average for the S&P 500 currently sits at 3,894, representing potential downside of 8% from current levels.

Conversely, if the S&P 500 is able to decisively close above its 50-day moving average, that would tee the market up to retest its record highs made last week at 4,393, suggesting potential upside of 4% from current levels.

Year-to-date, the S&P 500’s 50-day moving average has successfully acted as support five separate times amid market sell-offs.

Technical analyst Katie Stockton views the current sell-off as a “healthy pullback” that could represent a solid buying opportunity for investors.

“I would be looking for opportunities to add exposure (and, cover shorts) in the coming days assuming the signal gives way to stabilization,” Stockton told Insider on Monday.

Meanwhile, Fundstrat’s Tom Lee thinks stable bond yield spreads suggests that the stock market won’t stage a deeper sell-off, and that the rising fears of COVID-19’s Delta variant set risk assets up well for a rally in the second half of 2021.

“We don’t expect this period of chop to lead to a larger 10%-like decline for markets. Sure, a 3%-5% sell-off, even to S&P 500 4,100 is possible,” Lee said.

The S&P 500 is currently down about 4% from its record highs reached last week, and is up about 13% year-to-date.

S&P 500 stock chart
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S&P Dow Jones Indices to pay $9 million to SEC over its role in the collapse of a volatility-trading vehicle

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  • S&P Dow Jones Indices will pay the SEC a $9 million fine as part of a settlement agreement.
  • The SEC claimed negligence on behalf of S&P DJI for how it managed an index that underpinned a Credit Suisse volatility-trading product.
  • The company, a division of the S&P Global, said it neither admits nor denies the SEC’s allegations.
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S&P Dow Jones Indices will pay a $9 million fine to the US Securities and Exchange Commission as part of a settlement agreement.

The SEC claimed negligence on the behalf of S&P DJI for how it managed one of its indexes that underpinned a Credit Suisse volatility-trading product during a time of severe price swings.

According to the SEC, the S&P DJI should have disclosed that its S&P 500 VIX Short Term Futures Index ER had an “auto hold” feature that caused its value to remain static for more than an hour on Feb. 5, 2018. Meanwhile, the VIX was spiked as much as 115% between 4:00 p.m. and 5:08 p.m.

The static data, according to the SEC, contributed to a 96% slide in the value of Credit Suisse’s VelocityShares Daily Inverse VIX Short-Term ETN – also known as XIV – which was dependent on the S&P DJI index. That collapse cost investors an estimated $1.8 billion.

S&P DJI in a statement agreed to pay the penalty and to cease and desist from committing any future violations. But it neither admitted nor denied the SEC’s allegations.

“When index providers license their indices for the issuance of securities, as S&P DJI did here, they must ensure that the disclosure of critical features of their products, as well as the publication of real-time values, are accurate,” Daniel Michael, chief of the SEC enforcement division’s complex financial instruments unit, said in a statement.

The downfall of XIV showed the risks of shorting volatility, which had become a wildly popular – and profitable – trade at the time as markets sat placid for months. On Feb. 5, 2018, however, the VIX saw it’s fourth-biggest spike on record, squeezing out many of those short-sellers.

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Nearly half of Americans are too nervous to invest in stocks right now, new survey shows

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  • An Allianz survey found that 48% of Americans do not want to take action in the equity market right now.
  • The survey showed nearly 75% of Americans foresee stock-market volatility picking up again in 2021.
  • Analysts say more volatility is likely in store as more strong economic data challenges the Fed’s signaling on interest rates.
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Many Americans want to stay on the sidelines of the stock market this year as worries mount that volatility will accelerate and hurt their investments, according to a new survey from Allianz.

48% of the 1,005 respondents told the firm they want to stay neutral and not invest in the market right now, a rise from 43% over the final quarter of last year. That statistic runs parallel with findings that 74% of the group believes equity markets will continue to be very volatile this year.

The cautious tone comes as the US economy shows further signs of recovery from the coronavirus pandemic, with data this week showing a nearly 10% jump in March retail sales and new unemployment filings at a pandemic-era low.

“Investors seem to be in limbo right now, wavering between nervousness about the potential for volatility and hope for a better year, resulting in a lot of inaction that can be costly in the future,” said Kelly LaVigne, vice president of consumer insights at Allianz Life.

As the S&P 500 recently has climbed to all-time highs, Wall Street’s so-called fear gauge – the Cboe Volatility Index (VIX) – has slid back to its lowest level since before the start of the COVID-19 crisis. But volatility accelerated in the tech sector earlier this year as rising interest rates spurred concerns about the effect of higher borrowing costs on businesses. That prompted a sharp pullback in numerous high-flying tech stocks and knocked more speculative areas of the market like SPACs and green energy.

Another possible source of volatility involves the Federal Reserve, which has historically moved markets with rate-hike guidance. Inflation – which the central bank monitors closely when making decisions – is rising as the economy recovers, and although the Fed has said it will keep rates near zero until at least 2024, any deviation from that could jolt markets.

Talks over tax policy and infrastructure spending in Washington may also be a source of volatility for stocks moving forward this year.

Read more: Buy these 16 stocks with more than 10% upside that are set to increase dividend payments for years to come, UBS says

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3 reasons why volatility could come roaring back to a stock market that’s drifting along near record highs, according to UBS

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Traders at the New York Stock Exchange.

  • A key tracker of stock-market volatility at its lowest since early 2020 at the same time that US stocks are at record highs.
  • Investors should anticipate Wall Street’s so-called “fear gauge”, or VIX, to come off those lows in the coming months, said UBS.
  • Volatility may pick up pace as investors wrestle with inflation worries and COVID-19 variants.
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Wall Street’s key measure of stock-market volatility is at its lowest since the COVID-19 crisis took off in the US last year, but that calmness will likely break over the next few months, according to UBS.

The US stock market has soared to record highs in 2021 on the back of accelerating coronavirus vaccinations worldwide and roughly $5 trillion in financial aid deployed by the US government to mitigate the pandemic’s economic damage. The vaccinations and stimulus packages have been laying the groundwork for a further reopening of the world’s largest economy as people begin to rebuild work and school routines and spend the money sent to them by Uncle Sam.

The S&P 500 index has shot above the 4,100 level and the Dow Jones Industrial Average tracking blue-chips is at its strongest levels, driven by cyclical sectors such as energy and industrials that stand to benefit from increased economic activity.

Wall Street’s so-called “fear gauge,” at the same time, has dropped below the 17 level, the lowest since early February 2020, before the World Health Organization declared the coronavirus outbreak a pandemic. But don’t expect the Cboe volatility index to continue to stay that low, said the world’s largest wealth manager in a note published Friday.

UBS noted a news report that at least one investor bought about $40 million in VIX call options that indicate the buyer expects market volatility to pick up pace over the next three months. One or more investors anticipated the VIX to reach above the 25 level and rise towards 40 by mid-July, Reuters reported, citing trading data.

“We see reasons to expect periodic bouts of higher volatility in the near term,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in the note.

Growth vs inflation

Firstly, investors may be torn between optimism over accelerating economic growth and worries over higher inflation. Among the signs that recovery is taking further hold was the recent and strongest reading in services-sector activity since 1997 from the Institute for Supply Management. European growth should also strengthen as vaccinations increase.

“Still, as pent-up demand meets supply constraints, a pickup in inflation could well unsettle investors,” said the investment bank. This week, Dallas Federal Reserve President Robert Kaplan said inflation could rise “well in excess of 2.5%,” over the summer, which would be well above the Fed’s 2% target.

COVID-19 strains

Investors have so far looked through news about variant strains of COVID-19. “This optimism could be put to the test by the spread of new variants of the virus, especially in areas where the vaccination effort has been progressing well, such as in the US.”

UBS noted “pockets” of rising infections in Ohio and Wisconsin.

Trading activity

Volatility has been “sporadically heightened” by a rise in institutional and retail activity in the options market, along with the increased share of growth stocks in major equity indexes, said UBS.

“In the first quarter we saw retail activity driving volatility in individual stocks, such as GameStop, which spilled over into broader market swings,” said Haefele.

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The stock market’s fear index just dropped below a key level that suggests further upside ahead

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  • A decline in stock market volatility over the past few weeks suggests more upside ahead for stocks.
  • On Tuesday, the CBOE Volatility Index fell below the key 20 level and hit its lowest levels since the start of the COVID-19 pandemic.
  • According to Fairlead Strategies’ Katie Stockton, a consistent VIX reading below 20 would signal a bullish shift in sentiment.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The stock market’s fear gauge fell below a key level on Tuesday that suggests further upside ahead for stocks.

The CBOE Volatility Index, also known as the VIX, fell below the 20 level and hit its lowest point since the start of the COVID-19 pandemic. A VIX below 20 is seen as a signal that the stock market is transitioning from a high volatility regime to a low volatility regime, according to Fairlead Strategies’ Katie Stockton.

And according to Fundstrat’s Tom Lee, a fall below 20 in the VIX signals a risk-on environment that would spark fund flows into stocks from systematic and quantitative investment funds.

“A fall below 20 takes this volatility index to pre-2020 levels and a drop in the VIX would be a risk-on signal,” Lee said in a note last month.

But the VIX has staged multiple head fakes over the past few months, briefly falling below 20 before spiking higher in February, November and August.

That’s why Stockton recommends investors wait for confirmation of a breakdown in the VIX before making any portfolio changes, like removing market hedges. Confirmation of a VIX breakdown would require consecutive daily closes below the 20 level, according to a Tuesday note from Stockton.

“This would mark a potentially bullish shift in sentiment, and a move from a high-volatility regime to a low-volatility regime, last seen pre-Covid with a new floor for the VIX near 11,” Stockton said, adding that a VIX breakdown “would support near-term upside follow-through for the inversely correlated S&P 500.”

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Wall Street’s favorite volatility index is the latest stock-market bubble, JPMorgan’s quant guru says

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  • The Cboe Volatility index – or VIX, commonly known as the stock market’s fear gauge – is the latest bubble to form, JPMorgan’s Marko Kolanovic said.
  • The forward-looking gauge of expected price swings currently trades with an 18-point spread to S&P 500 realized volatility, a historically high reading.
  • Precedent suggests the gap will lead to weaker volatility and rising stock prices, Kolanovic said.
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The latest bubble in the stock market isn’t a stock at all, but Wall Street’s favorite volatility metric, Marko Kolanovic, global head of macro quantitative and derivatives strategy at JPMorgan, said Wednesday.

Stocks’ climb to record highs earlier in February triggered speculation around whether some sectors had grown overstretched. Elation over tech stocks, SPACs, and cryptocurrencies all prompted calls that the market was rife with bubbles.

Such concerns are largely overblown, Kolanovic said in a note to clients. The FANG coalition – Facebook, Apple, Netflix, and Google-parent Alphabet – has mostly traded flat for six months despite recovery optimism. The energy and financial names that have ticked higher in recent sessions still trade well below record highs.

However, the Cboe Volatility Index – or VIX, which is a reading of 30-day expected stock volatility – sits squarely in bubble territory, the quant expert said. The index provides an implied reading of future S&P 500 price swings calculated from options contracts. Yet the VIX is now decoupled from S&P 500’s underlying volatility, “indicating a bubble of fear and demand from investors looking to hedge or profit” from a potential sell-off, Kolanovic said.

The so-called fear gauge currently trades at a roughly 18-point spread with S&P 500’s two-week realized volatility, according to JPMorgan. That gap is in the 99.6 percentile over the past three decades, implying a historic disconnect between the VIX and the volatility it’s meant to measure.

Such instances typically happen after massive shocks in the VIX and give way to a decline in volatility, Kolanovic said. Historical data also suggests the S&P 500 will rise as the volatility index course-corrects, he added.

JPMorgan recommended investors sell the “VIX bubble” until such a correction takes place. The potential for new fiscal stimulus and ultra-loose monetary conditions make for strong macro fundamentals, and falling daily case counts suggest the US can soon recover from the pandemic. Additionally, the rotation from growth to value stocks is keeping the correlation between stocks low. While some continue to warn of growing risk in the market, funds are piling into stocks as price swings moderate, Kolanovic said.

“Low volatility drives inflows, triggering a positive feedback loop of a rising market and declining volatility,” he added.

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