So Friday was fun. The Dow dropped 665 points with the major U.S. equity indices dropping 2%, erasing a chunk of the abnormally large gains captured in January. A great deal of attention was given to the lofty level reached in the 14-day Relative Strength Index, as it got to near 90. Well that’s now been corrected, with momentum indicator falling under 70. It’s often said that the market rarely bottoms on a Friday as traders become nervous holding long exposure into the weekend. With that, I’d be surprised if we didn’t see a little bit more selling pressure, especially after sentiment readings got as high as they did in January. However, the earnings data appears to be coming in strong for Q4, so the dip buyers will likely still have a bit of confidence left before completely abandoning ship. It’s important to remember that this type of price action, you know, prices actually moving in more than one direction, is normal. It’s amazing the number of calls I’ve seen published this weekend calling an end to the bull market simply because the S&P is off at high by a couple of basis points – truly amazing. Alright, let’s get into some of the charts that highlight the developments from last week’s sell-off.
The Dow started the year as the strongest index between the Nasdaq, NYSE, R2K, and the S&P. After last week’s decline the Russell 2000 has moved into the red year-to-date.
Year-to-Date sector returns show four of the major S&P sectors now under-performing the major index and down on the year. Utilities have taken a hit with the rise in interest rates, followed by Energy, Materials, and Consumer Staples. Meanwhile, Consumer Discretionary (cyclical), Financials, and Health Care are currently the best performing sectors for the start of the year.
Equal Weight vs. Cap Weight S&P 500
As I mentioned with the first chart as small caps are now negative YTD, the down trend of equal weight vs. cap weight S&P 500 has now declined to 2012 levels. Having been a theme for most of 2017, the largest components of SPX have led the drive higher, erasing the relative strength RSP put in during 2016.
Equity Put/Call Ratios
With Friday’s large move lower, an interested development took place in the three put/call ratios. We saw a large pick up in put buying relative to call buying in equities while investors actually seemed to be buying the dip in index options, shifting the index put/call ratio to one of the lowest levels seen int he last few years.
I last showed this chart in a post in August, questioning the advance in gold that wasn’t being confirmed by the yen. The shiny metal went up for a few more days before sinking back to $1,240/oz. We then had a bullish divergence in the yen, as it put in higher lows as gold was making a lower low – once again gold flipped direction and headed higher as it confirmed what the yen was telling us. Now we have a replay of what we saw in August as the yen has yet to get back the upper-end of its 12-month range while gold has created a false breakout from its August high. The break of $1,350 without the yen was tough for gold to sustain, so the move lower isn’t too much of a surprise. The yen has now begun to roll over, putting additional pressure on gold prices.
One of the big stories from Friday was the large move in the $VIX, which spiked 28% on Friday and over 50% for the week, shown by this CBOE table. The largest move in volatility was in the 9-day VIX ($VXST) with volatility across most of the measured instruments rising double-digits last week. However, volatility for IBM, Apple, Amazon, and Google were actually flat or lower on the week after the large tech companies reported earnings, taking some of the air out of the volatility ramp-up into their reports.
Volatility Rises 50%
Yes, discussing the VIX in percentage terms isn’t technically correct since it’s a percentage itself, but stick with me for a second. Steve Deppe shared this interesting chart, looking at previous times the Volatility Index has risen 50+% in a single week. Like last week, many of the previous instances also had the VIX finish above its upper Bollinger Band. While the sample size is admittedly small, the following moves in volatility have historically been largely lower, averaging a 1-week decline of 11% in 80% of the periods. In fact, two weeks later the VIX was only higher 10% of the time. Josh Brown also shared on his All Access Twitter account a stat from Ari Word, CMT that the S&P 500, when it’s still above its long-term moving average, 13-weeks after the VIX has moved 50% higher is up on average 4.5% vs. just 2.1% in all periods since 1990. So while the historical expectation in the intermediate term is for volatility to come back down, previously this time of spike in the VIX has acted as a nice propulsion high for stocks as well.
Spot VIX Rises Above All VIX Futures
Tom McClellan shared this interesting point over the week, highlighting that spot VIX moved above all VIX futures contracts during trading on Friday, something its typically only done int he resent past during periods of economic or geo-political events. The prior two occurrences being Brexit and the U.S. election. While this condition can persistence or repeat itself before equities ultimately find a low, like we saw several times in 2015, it is a development that’s often led a move higher in stocks.
Volatility Podcast Interview
I recently spoke with Andrew Swanscott on his podcast, Better Systems Trader about my Charles Dow Award paper on volatility spikes, if you’d like to give it a listen here’s the link: Forecasting a Volatility Tsunami with Andrew Thrasher.
Super Bowl Winner
Naturally there will be lots of commentary and tweets on Monday morning about who won the Super Bowl and the market’s resulting rise or decline. The two aren’t correlated, don’t waste your time reading about it….
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.