The stock market’s slow crawl to fresh records in recent sessions included a retreat for the CBOE Volatility Index (VIX). VIX, the market’s “fear gauge,” reflects expectations for future, short-term movement in the broad S&P 500. It’s been creeping higher in Q3, but moved back toward 52-week lows with last week’s 9% drop.
VIX is a popular snapshot of market sentiment, but its scope may be limited—especially now. Not all volatility measures are flashing the same cool market temperament. Take a look at small caps and emerging markets. Movement in their respective volatility indexes indicates that record highs in the S&P 500 and Dow Jones Industrial Average, as well as multi-year highs in the NASDAQ Composite, aren’t necessarily a reflection of what’s happening across the broader market at home and abroad.
First, a closer look at VIX. The S&P 500 broke records again last week after gaining nearly 3% so far in Q3 and nearly 9% year to date. SPX’s close above 2010 was important, at least in the short term. VIX dipped back toward 12 (the low end of the 52-week range) late week after the latest Federal Reserve policy meeting, “quadruple witching” options and futures expiration, and the Alibaba initial public offering— which was popular among institutional and retail investors—did little to alter the underlying positive market tone.
Keep in mind, after dropping nearly 17% in Q2 to seven-year lows through early July, VIX is up 5% so far in Q3; notably, it’s down 11.5% year to date (see figure 1).
Dissension in the Ranks
But small caps aren’t keeping pace with the broader-market measures. The Russell 2000 Small Cap Index (RUT) is down nearly 4% in Q3 and is now in negative territory year to date. The CBOE Russell Volatility Index (RVX), the “VIX” for the small caps, is up 5% in Q3 and essentially flat year to date.
There’s more to consider. The
Elsewhere, it was the Fed’s status quo that prompted a slight shift in the Treasury bond yield curve, chiefly an increase in the short end, around the 2-year point on the curve, and a decrease in longer-dated yields. Buried in the fine print (just kidding) of the Fed’s latest policy statement was its renewed attention on shifting bond yields. Fed members noted that changed trading rules may pose broader market liquidity risk should bond prices fall too far, too fast.
All told, diverging markets raise important questions. Could more volatility lie ahead for these measures? And are they evidence of the first cracks in the foundation of record-setting gains for the stock market? The answers aren’t obvious, but what’s pretty clear to me is the need now more than ever to add small-cap stocks, bond yields, and emerging-market measures to a volatility-tracking tool kit.
Unknown Catalysts
The upcoming week, on the surface, is light on potential market-moving giants. Looking forward, the kickoff of Q4 on October 1 brings earnings back in focus, including
This week’s key economic stat is possibly GDP Friday, but new home sales on Wednesday and durable goods on Thursday are also worth watching (see figure 2). Both are helpful measures of consumer confidence, a potential sign that employment, and more importantly, wages, have perked up enough for consumers to snatch up big-ticket items.
Good trading,
JJ
TD Ameritrade, Inc., member FINRA/SIPC. Commentary provided for educational purposes only. Past performance of a security, strategy, or index is no guarantee of future results or investment success.
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