The
days of tranquil, docile markets may be nearing an end. Measures of
risk are rearing their heads once again, with the CBOE Volatility Index
VIX, +13.19%
closing at its highest level of
the year in Thursday trade and jumping above its 200-day moving
average, now at 13.54, Friday for the first time since December of last
year (see chart below):
Source: FactSet
The gauge finished at 12.96 on Friday, but was pressing
higher Monday, with an early peak of 15.11, representing a roughly 17%
jump.
Broadly speaking, moving averages are used by technical
strategists to help to judge if short-term and long-term directional
momentum in a security is intact. Right now, the VIX, also known as Wall
Street’s fear gauge is creeping toward the long-term average, which
suggests that it could attempt a firmer breakout, in the parlance of
chart watchers. See:Blame options expiration, not politics, for stock-market pullback, says top quant Also see: Dow futures slide more than 100 points as doubts over Trump’s agenda build
To
be sure, the VIX remains well below its historical average of 20, but
the gauge is a sign of how much investors are demanding to pay for
protection 30 days in the future for price swings in the S&P 500
index
SPX, -0.08%
Lower levels of so-called
implied volatility signal complacency to some, while higher readings can
be a sign of elevated anxiety that the market is headed for turbulent
times.
Last week, the VIX climbed around 15%, which marked its
sharpest weekly rise since the 22.7% jump during the week ended Dec. 30,
according to FactSet data.
There is a reason to believe that
choppier times are ahead, particularly after the S&P 500 and the Dow
Jones Industrial Average
DJIA, -0.29%snapped a 109-streak of days without a 1% drop—an
uncanny record for equities. On Monday, the Dow was on track to mark
its longest streak of down days, eight in a row, since Aug. 2, 2011,
according to Dow Jones data. Check out: A live block of the health-care bill vote
Over
the past four months, Wall Street has been sanguine about President
Donald Trump’s election victory, betting heavily that pro-growth pledges
made during his campaign, including tax cuts, infrastructure spending
and deregulation, will juice the economy and the broader market.
Historically,
the VIX declines as stocks move higher, so it isn’t uncharacteristic to
see the index trade slightly higher as stocks beat a steady retreat.
The
Dow is up 12.4% since the election victory, the S&P 500 has climbed
9.7%, and the technology-laden Nasdaq Composite Index
COMP, +0.19%
has gained 12.2% during that period. Securities perceived as safe like Treasury notes
TMUBMUSD10Y, -2.08%
have sold off, pushing yields,
which move inversely to prices, higher—at least temporarily.
However,
the wheels on the so-called Trump trade appear to be coming off the
pro-growth bandwagon, with the Dow and S&P 500 set to book their
first monthly losses since October, if March doesn’t stage a rapid
turnaround over the next week or so. Yields have also retreated from
postelection highs.
“The indices had been able to weather the
storm in fairly good fashion up until this past week, when we saw
trendline breaks in several major indices,” said Mark Newton, technical
market analyst and founder of Newton Advisors.
He said a number
of sectors, represented by the exchange-traded funds that track them,
have been unwinding earlier gains. Those include the Health Care Select
Sector SPDR ETF
XLV, +0.05%
which ended down 1.2% for its
worst weekly decline since January. The Consumer Discretionary Select
Sector SPDR ETF
XLY, +0.24%
which finished off 0.9%, and the Industrial Select Sector SPDR ETF
XLI, -0.26%
down 1.8% for the week, both marking the worst weekly drops since December.
Meanwhile,
the banking sector, which had enjoyed healthy gains in the wake of
Trump’s promises to loosen Wall Street regulation, finished the week off
3.7% for the worst such drop since January 2016, according to FactSet
data. See: Suddenly, stock-market investors fear Trump will drop the fiscal-policy baton Check out: Trump ultimatum: Pass health bill now or live with Obamacare
Part
of the reversal has centered on Trump’s inability to demonstrate his
deal-making prowess. And doubts about his abilities are festering as the
vote to repeal and replace President Barack Obama’s signature
health-care law was pulled on Friday. Stumbles for the Trump administration
in negotiating a successful health-care pact raises the specter of
doubt around the odds of the president implementing other policies.
However, in the end, some analysts believe investors may be OK with Trump just moving on to other matters. See: Here’s why financial markets are obsessed with the health-care vote
“Even
if the bill passes the House, of course, the story’s not over. It still
has to go through the Senate and then be reconciled, but a pass would
be a good sign for the market. If it doesn’t, we might see a pullback.
If so, I would expect that pullback to be modest and short lived, as
fundamentals remain strong. And in the medium term, a fail might
actually be better for markets than a pass,” wrote Brad McMillan, chief
investment officer at Commonwealth Financial Network in a Friday note.
In
any event, volatility might be here to stay, which for some investors
could be a good thing, as those who pick stocks for a living, including
many hedge-fund managers, grow optimistic at the prospect of showing off
their purported skills. Read:Eton Park is going out of business—highlighting troubled times for hedge funds
