January 25, 2022
Good morning,
Talk about elevated volatility. The major indexes dropped over 4% (no typo, four whole percent) yesterday morning before turning around, recouping all the losses on the day, and finishing just slightly above where they ended on Friday. In the case of the S&P 500, it finished the wild day up 12pts or .28% – that was a very hard way to make 28bps.
Futures have spent most of the overnight session underwater, not taking yesterday’s turnaround as an all-clear signal, and are off ~1.5% pre-open. Can we draw any conclusions from yesterday’s extreme behavior? One thing is clear, no surprises occur when the VIX spikes toward 40 as it did yesterday morning – anything can and usually does unfold. Looking at the history of these capitulative kinds of days; when the S&P is 7.5% or more off its all-time high, the results lean toward favorable. Of the 20 occurrences, the S&P 500 Index moved higher over the next week and month, 70% of the time. That batting average improves as one looks out six months and a year. (Dorsey Wright Data) The worst outcome in the dataset was the most recent; March 2nd 2020. The market was off another -11% one week following that one-day reversal of fortune. March 2020 – Covid 19 – let’s call that one an outlier. Net – net, while the days following days like yesterday remain volatile, you can draw some comfort knowing that yesterday’s action is much more often than not associated with some kind of bottoming process.
The VIX is above 33 this morning. Of the many things that portends, one is that I expect to write you again tomorrow. Have a good one … this too shall pass.
Be well,
Mike