If the calendar is any guide, a seasonally quiet period for the U.S. equities market lies ahead. Beyond a smattering of economic data this week, there isn’t much on the docket that appears capable of roiling financial markets or spoiling the S&P 500’s (SPX) shot at record number 50 for 2014. Then again, as traders know, there’s always some risk of getting caught flat-footed should unexpected volatility bubble up.
Indeed, market participants seem to be anticipating a holiday lull. As evidence, the CBOE Volatility Index (VIX) touched a two-month low of 11.53 on Friday. The market’s “fear gauge,” which is tied to sentiment in the broad SPX, did jump to 14.75 intraday last Monday amid energy sector anxiety. It then promptly fell four days straight to finish the week down 11% near 12 (see figure 1). Now, history has shown us that dips below 12 for the VIX this year have typically been followed with a relatively strong upside breakout. There’s no guarantee that pattern will repeat, but safe to say that VIX at these levels is drawing renewed attention.
Figure 1: The CBOE Volatility Index (VIX) dipped below 12, a psychologically significant marker for... [+]
Other measures of volatility tracked lower, too. The CBOE Emerging Markets ETF Volatility Index (VXEEM), the “VIX” for emerging markets, was down 1.51 to 18.17 Friday and lost 1.15 points for the week. Implied volatility in small-cap stocks, as measured by the CBOE Russell Volatility Index (RVX), dipped below 19 and finished well off its Monday high of 22.33. Even the CBOE Crude Oil ETF Volatility Index (OVX), which had been agitated in recent weeks as oil markets suffered a deep price drop, cooled off in trading last week. The index hit a two-year high of 40.63 Monday, but had slipped back to 34.16 on Friday. OVX lost about 2.5 points on the week.
Points for Individuality
There’s more to the story than just expectations for slow trading in the back half of December. Correlations across the equity market have been falling since mid-October. The CBOE S&P 500 Implied Correlation Index (ICJ), which is designed to track the degree of co-movement among the individual components of the SPX, eased to the lower end of its six-week range through last week (figure 2).
Lower correlations reflect “mixed trading,” or the type of market action that often leads to declining levels of broad-market volatility for benchmarks like the S&P 500 in favor of individual stock movement.
Figure 2: The CBOE S&P 500 Implied Correlation Index (ICJ) traded at the lower end of its six-week... [+]
Oil Supply, Retail Sales on Tap
This week kicks off with the latest TD Ameritrade Investor Movement Index® (IMXSM) on Monday (refresher: IMX tracks holdings/positions, trading activity, and other data from a sample of our 6 million funded client accounts). Let’s see what stocks this group of retail investors bought and sold during “quiet” November.
Thursday’s report on monthly retail sales stands out on this week’s thin economic calendar, a schedule considerably lighter now that an upbeat November payrolls report has come and gone (see figure 3 for the full economic release schedule). The market could be putting a lot of pressure in the retail report to drive trading. Falling gasoline prices presumably plumps up wallets for spending elsewhere this holiday shopping season. Can retail data complete the story started by last week’s strong employment report?
It’s a slow week for earnings as well. A couple of homebuilders, Hovnanian (HOV) and Toll Brothers (TOL), report Wednesday. Retailers Costco (COST), RadioShack (RSH), and Lululemon (LULU) report later in the week.
Crude oil inventory data numbers on Wednesday might earn a bit more attention than usual after the recent slide in oil prices and energy stocks. Some of the ag commodities, also on the move in recent weeks, might see some reaction to the USDA’s World Agricultural Supply and Demand Estimates (WASDE) report on Wednesday as well.
Notably, this week may be the last business-as-usual schedule for a while. Next week brings a “quadruple witching” quarterly options and futures expiration, which can pack its own surprises as big players begin to unwind positions. After that, the holidays are upon us.
Notice from the charts that VIX hit its historic lows in late December last year and ICJ fell into mid-January. Seasonality certainly favors slow trading and falling volatility into the new year. Of course markets don’t always behave the way we expect, even with Santa watching.
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. Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
The IMX is not a tradable index.
