The days of tranquil, docile markets may be nearing an end, MarketWatch reports.
Measures of risk are rearing their heads once again, with the CBOE Volatility Index 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.
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.
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. 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.
Over the past week, the VIX has climbed around 15%, which would mark 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 snapped a 109-streak of days without a 1% drop – an uncanny record for equities.
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 has gained 12.2% during that period. Securities perceived as safe like Treasury notes 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 post-election 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 many sectors, represented by the exchange-traded funds that track them, have been unwinding earlier gains.
Those include the Health Care Select Sector SPDR ETF which ended down 1.2% for its worst weekly decline since January. The Consumer Discretionary Select Sector SPDR ETF which finished off 0.9%, and the Industrial Select Sector SPDR ETF 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.
Part of that 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 healthcare law was pulled on Friday.
Stumbles for the Trump administration in negotiating a successful healthcare 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.
“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.
This article was published by MarketWatch.