Moving Averages and Volatility

By Charlie Bilello

The Dow closed below its 200-day moving average this week for the first time in two years.

That ended the longest streak above the 200-day moving average since 1987. At 501 trading days, it was the seventh longest run in history.

Data Source for all charts/tables herein: Bloomberg, YCharts, Stockcharts.com. Note: all data in this post is price data, not total return.

How common is a close below the 200-day moving average and what has it meant for the Dow historically? Let’s take a look…

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Sentiment Snapshot: Vol Rising

By Callum Thomas

This week in the sentiment snapshot I take a look at volatility.  For context, in the sentiment snapshot series I look at some of the charts from the weekly survey on Twitter, which asks respondents to indicate whether they are bullish or bearish for primarily technical or fundamental rationale. On that note, the overall net-bullish sentiment has now made almost a full recovery so it leads us into a question of whether this is well-placed optimism… which leads into a series of charts on the VIX and volatility.

The key takeaways from the weekly sentiment snapshot are:

-Net bullish sentiment recovered to the strongest point since the correction began, with fundamentals sentiment reaching a new high.

-Sentiment has diverged from the VIX to the bullish side.

-Volatility is likely to stay higher from here, but with a positive fundamentals backdrop it may well be the more virtuous form of volatility.

1. Equity Sentiment – Fundamentals vs Technicals:  A new survey high was reached this week for “fundamentals” net-bullish equity sentiment. This along with a tickup in technicals sentiment has brought the overall net-bulls to an almost full recovery since the correction began (more about that in the next chart).  On the all important question of whether we see a new high in the S&P500 this year, it’s all going to come down to the fundamentals i.e. the earning/macro pulse, and that there is such optimism on the fundamentals is a positive sign in this respect.  Albeit my inner contrarian is saying ‘hmmm’…

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When Will Volatility Finally Spread?

By Kevin Muir

Everyone loves to talk about VIX. I guess it’s because VIX is relatively easy to trade, and even more importantly, during the 2008 Great Financial Crisis, long positions were monstrous winners.

Hedge fund managers made their careers with that move. It was an amazing opportunity to make money.

During the summer of 2008, the VIX was flopping around between 15 and 25. But then September hit. In an unprecedented development, the VIX rallied from 25 to 90 in less than three months. This was supposed to never happen. The index was implying a level of volatility for stocks that had never been seen in the history of financial markets.

Continue reading When Will Volatility Finally Spread?

Higher Volatility Does Not Have to Equal Lower Stocks

By Kevin Muir

Too many market participants believe rising stock market volatility can only occur in down markets. It might be true that rising volatility is considerably more likely to occur in times of market stress, but it’s nowhere near as certain as most pundits believe.

While there can be no denying that stock markets often take the escalator up and the elevator down, this generalization is far from a law of nature. Volatility is the measure of the variability of price returns. There is nothing written in the finance books saying that stocks cannot go up just as quickly as they go down.

Don’t believe me?

Continue reading Higher Volatility Does Not Have to Equal Lower Stocks

My Leitner-esque Moment

By Kevin Muir

They’re back. I thought they had all given up, but like an old college buddy who’s going through a bad divorce and just needs a place to crash for a ‘few days,’ the corporate credit skeptics are a tough lot to shake.

This crew is a left-over remnant of the 2008 Great Financial Crisis. After watching the global financial system implode in a crisis that threatened to topple the entire world economy, there is a group of market participants who believe the next dislocation is right around the corner – only this time will be even worse given the increased debt levels. Although their views can be nuanced, usually they believe the market stresses from the last crisis will simply replay in a more dramatic fashion. In 2008 stocks fell, credit spreads exploded higher, VIX shot to the moon and sovereign long-dated bonds were the best asset to own by a long shot. Therefore at the hint of any trouble, they skedaddle to put on whichever part of this trade is most in fashion.

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The Return of Volatility, Part 2

By Callum Thomas

A few weeks ago I wrote an article called “The Return of Volatility” in the midst of the February stock market correction. I highlighted the prospects of a change in market regime from one of ultra low volatility to a period of higher volatility.  My view remains that we will likely see a sustained period of higher volatility for stocks, but due to a number of positive dynamics it may well be more similar to the late 1990’s than the pre-financial crisis period.  In other words, rising volatility with rising stocks.

Now that’s just looking at one asset class – stocks, or specifically the S&P500.  But what about other asset classes?  Curiously, this period of ultra low volatility for equities has been mirrored across the major asset classes. The second chart in this report shows how realized volatility for the US dollar (the DXY), Commodities (GSCI Commodities Index), and the US 10-Year Government Bond Yield has dropped to very low levels. In fact there seems to have been a synchronization in volatility across asset classes.

But as I outlined in the presentation “Monetary Policy and Asset Allocation” as the global economic cycle matures, the tides are turning for global monetary policy.  This is going to be a key driver of higher volatility across asset classes in the months and years to come.  Monetary policy (traditional and extraordinary policy tools) was a force for volatility suppression over the past 10 years, and now that is changing.

The key points on the transition to a higher volatility regime are:

Continue reading The Return of Volatility, Part 2

Mirage? Inflation Still MIA as Number of Options Betting on Rise in Short Volatility ETF Surges

By Anthony B. Sanders

Like a mirage in the desert sand, inflation is still missing in action (MIA).

Core Personal Consumption Expenditures (PCE) growth YoY remains at 1.5% for January. The PCE deflator YoY remained the same at 1.7%.

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But the number of options betting on a rise in short-volatility ETF is surging.

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Yes, inflation is still a mirage (at least to The Fed). That should put a lid on further rate hike/unwinding activity. Or not!

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Volatility and Interest Rates

By Tom McClellan

VIX Index versus 3-month T-Bill yield
February 23, 2018

Why is the VIX spiking now?  Because now is when it is supposed to do that.

Volatility and interest rates have an interesting relationship, going back many years.  Higher interest rates pull money away from the stock market, and thus make it so that prices have to travel farther to find liquidity, after a positive or negative stimulus.

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