July 29, 2024
Good morning,
From a market analysis point of view, last week’s spike in volatility might have been the most significant development of the week. Yes, the S&P 500 Index (SPX) saw its first 2% down day in nearly a year, and the NASDAQ Composite Index saw its biggest one-day decline since 2022 (I still twitch just typing that year). Google blinked on their earnings announcement hinting that stock prices may be ahead of the AI cycle short-term but are likely still undervalued long term. And there was an uptick in recessionary risks, fueled by commentary from former New York Federal Reserve President Bill Dudley. But volatility can often shed light on what’s immediately ahead for markets.
The volatility index (VIX) is a mathematical expression of the level of fear being expressed by investors at a point in time. It is a weak linkage; any mathematical measure of emotion is going to be loosely correlated, but the VIX is the best we have. Normally, the VIX trades on the floor of its multi-year trading range in the low-teens. It gets attention when it spikes up, several times per year. It is important because market corrections and changes in market trends (bullish to bearish and visa-versa) are always accompanied by volatility spikes. However, the reciprocal does not hold up – all spikes do not lead to trend changes or meaningful corrections. The larger the spike, the more disconcerting the market outcome. A break of 20 on the VIX is loosely considered a warning sign.
Last week the VIX spiked to 19.5 before settling down on Friday’s bounce rally to 16.5. It now has investor’s attention if not yet their concerns.
This morning, Financial markets have started the week on a favorable tone, with both equities and fixed income generally rallying in overnight trading. The next few days offers a smorgasbord of potential return (and volatility) drivers, whether we’re talking about central banks (BOJ, Fed, and BOE), earnings (four of the Magnificent Seven report Tuesday-Thursday, MSFT, META, AMZN, AAPL), or economic data (we get the ISM on Thursday and then payrolls on Friday).
We have had “big weeks” before in 2024, but this one feels a little different. You can see that through the prism of implied volatility. See you Thursday.
Be well,
Mike
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