The S&P 500 continued to chip away at uncharted territory last week after capturing the 2,010 level for the first time. In fact, the S&P 500 and the narrower Dow Jones Industrial Average both logged their fifth consecutive weekly gain. What’s most interesting perhaps is the pace of the advance. It’s been impressively slow, evident in a rail-thin, four-point average daily price swing in the S&P 500 over the past two weeks.
Interestingly, despite the methodical advance and record highs, some measures of market volatility are creeping noticeably higher. The next driver likely to goose volatility is anyone’s guess, but it’s looking more likely that the recent uptick in volatility may leave the market more vulnerable to a surprise news event.
Retail Spotlight
Anticipated news this week includes retail sales data (this week is back-loaded, see the full calendar in figure 3) and a handful of retailer earnings reports, including Kroger (KR) and Lululemon (LULU). Retail sales matter (remember, consumer spending is two-thirds of GDP), especially coming off the latest job data head-scratcher and as relatively strong auto sales last week could bode well for overall retail receipts. Let’s see if hiring has translated into spending. August’s payrolls number may have missed the mark overall, but the hiring concentration —business services, health care, and construction—are typically higher-skill, higher-pay positions (this former stock boy, bartender, and bouncer appreciates all ranks of the workforce, trust me) that could drive stronger spending.
Don’t forget that the latest TD Ameritrade Investor Movement Index® (IMXSM) will be released Monday (refresher: IMX tracks holdings/positions, trading activity, and other data from a sample of our 6 million funded client accounts). Let’s see if this group of retail investors continued to believe in this rally or if all-time highs and geopolitical risk perhaps pushed them to lighten market exposure.
Company headlines will also share space with the macro picture this week. Apple’s (AAPL) well-publicized product update on Tuesday has the tech world and financial markets a-Twitter. Stock and options volume in AAPL has picked up on our platform heading into the media event.
VIX Digs In—For Now
With these select catalysts on the immediate horizon, the CBOE Volatility Index (VIX) remains near 12. Even Friday’s typically market-moving jobs report, a below-expectations result that eventually cheered Wall Street because it tossed water on any notion of a more-aggressive Federal Reserve policy response, failed to budge the VIX. The index hit a Friday morning high of 13.18 in the wake of the lackluster numbers but drifted in the second half of trading. The index is down nearly 25% from a month ago (figure 1).
Figure 1: The CBOE Volatility Index (VIX) sits near 12, contained in a relatively tight band for... [+]
VIX, the market’s “fear gauge,” often ticks north in early September as the Labor Day holiday marks the end of vacation trading lulls. As the summer doldrums pass, trading volumes historically begin to return to normal levels. Including last Tuesday’s 0.27-point advance, VIX has moved higher the day after Labor Day 19 times in the past 25 years.
Cast a Wider Net
The recent leg higher in the volatility index actually dates back two weeks. It was near 11.5 on August 22 before climbing by more than 12% through midday Friday. In addition, the uptick is not limited to VIX. Figure 2 shows a number of other volatility indexes. For instance, volatility in the NASDAQ 100 ($NDX), as measured by the CBOE’s VXN, is down 17.3% in the past month, but up 15.1% in the past two weeks. Looking overseas, volatility in emerging markets, according to the CBOE Emerging Markets ETF Volatility Index (VXEEM), is down almost 20% from August 5 through Friday, but up 16.4% since August 22.
Figure 2: A range of equity, emerging market, and commodities volatility measures offering a broader... [+]
VIX represents the market’s best guess of what volatility for the overall market might look like a few weeks out. At 13, VIX is hardly at elevated levels. It’s also well below the early-August highs of more than 17. Still, the two-week trend reflects an uptick in risk perceptions across global equity markets, even as the S&P 500 continues the grind to new record highs. It could suggest that market participants are bracing for larger daily market moves. And that makes some sense, since September through October can be a volatile period for global equities.
Good trading,
JJ
TD Ameritrade, Inc., member FINRA/SIPC. Commentary provided for educational purposes only. Past performance is no guarantee of future results or investment success. Supporting documentation for any claims, comparison, statistics, or other technical data will be supplied upon request.
