Aug 27, 2020
A warning flashes for record U.S. stock rally
, Bloomberg News
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Fear gauges for the S&P 500 and Nasdaq 100 indexes may be providing fresh reasons for caution about the relentless rally in U.S. stocks.
The S&P 500 and Nasdaq 100 scaled new peaks Wednesday, but their respective measures of implied volatility also rose in tandem. Simultaneous increases in equity and volatility gauges are unusual, and a reason for concern for some.
Wednesday was the first time in about two decades the Cboe Volatility Index -- or VIX -- rose more than 5 per cent as the S&P 500 rose over 1 per cent to a record, Jason Goepfert, president of Sundial Capital Research Inc., wrote in a note. History suggests stocks tend to decline 1.2 per cent on average in the following month when that happens, he added.
“This might be the weirdest market I’ve ever seen,” Goepfert said, adding he’s seen market oddities for weeks, and so far “they haven’t mattered.”
That’s underscored by a surge in U.S. stocks that defied convention and skeptics alike. The Nasdaq 100 has rebounded 71 per cent from the virus-induced lows in March, and the S&P 500 is up 55 per cent. The rally has stretched valuations, and faces risks from stalled U.S. fiscal stimulus talks and the struggle to contain the pandemic.
Wednesday’s session also saw a 2.1 per cent rise in the Nasdaq 100 Index accompanied by a more than 10 per cent increase in the Cboe NDX Volatility Index. Both have climbed in August, but the move in the volatility measure may be due to investors chasing the stock rally, according to Susquehanna Financial Group LLLP.
“We are seeing more ‘upside panic’” in the Nasdaq, Chris Murphy, a derivatives strategist at Susquehanna, wrote in a note.
A range of uncertainties are set to be resolved in the months ahead, such as over stimulus spending, November’s U.S. presidential election and the possible introduction of a COVID-19 vaccine.
That’s going to bring VIX down to about 16, from about 23 currently, according to Michael Kelly, head of multi-asset at PineBridge Investments LLC. “It’s extraordinarily unusual for the VIX to stay above 20 for an extended period of time without a crisis situation going on,” he said in an interview.
