Fresh Breeze

Fresh breeze.  Stocks powered up yesterday as Wall Street got political and Congress gave a nod to financial markets.  Ten-year treasury yields ended yesterday’s session below 1% for the first time ever indicating that bond traders think that the economy is not out of the woods yet.

N O T E W O R T H Y

Don’t stop that loving feeling.  Are those butterflies in my stomach or motion sickness? Investors watching the stock market in recent weeks were not sure whether to breathe a sigh of relief yesterday or to adjust their footings for another day of pain. Just a day after the Fed announced a -50 basis point emergency rate cut which was met by a disappointed market selloff, stocks vaulted higher on a new type of driver.  The early session rally was led by the health care sector as Biden’s victory over Sanders in the Super Tuesday primaries reduced the probabilities of Medicare for all. Later in the session The House Of Representatives approved an $8 billion funding package to defeat the Coronavirus, adding to the $50 billion pledged by the IMF. The result saw the Dow Jones Industrial Average swing up by +1,173 points… after falling -785 points on Tuesday, rising +1,293 points on Monday, and (sorry to remind you) dropping by -3,583 last week.  Folks, this is volatility with a capital “V”.  The VIX index, which is based on S&P500 volatility closed out 2019 at 13, indicating relatively low volatility, but as you might guess, it has changed in the weeks since.  The index is calculated by using the implied volatilities of S&P500 options.  As traders increase demand for options, implied volatility increases and is reflected in the complex weighting scheme which results in the VIX index going up when emotions run high.  The number is actually expressed as an annualized percentage rate which describes how far the S&P500 can move in either direction over the next year.  If we divide the index by the square root of 12 we can get an idea of how far the S&P500 can go down OR UP within the next month.  With the VIX trading around 35 this morning, that would equal 10.1, which means up or down 10.1%. That is volatile, indeed.  Volatility is good news for day traders who live and die with volatility (mostly die, as the numbers would have it).  But what does it mean for long term investors like us?  Well, aside from a little bit of digestive distress, nothing.  The markets are chopping up and down trying to make sense of the Coronavirus impacts, the US elections, and all the news of the day.  It is clear that all of these things will certainly impact the global economy, some sectors worse than others, but it is also clear that the virus will pass, the elections will yield what they will, and the economy will endure, as it always has.  Sorry to sound anecdotal, but it is probabilistically factual. Probabilities also predict that this volatility is not over yet, but you probably don’t need to be a statistician to know that.

THE MARKETS

Stocks rocketed up yesterday after traders talked politics and politicians gave traders something to applaud.  The S&P500 rose by +4.22%, the Dow Jones Industrial Average climbed by +4.53%, the Russell 2000 traded up by +3.04%, and the NASDAQ Composite Index ascended by +3.85%.  Bonds continued to rise and 10-year treasury yields rose by +5 basis points settling at 1.05%.

NXT UP

- Factory Orders are expected to have declined by -0.1% after growing by +1.8% last month.

- Durable Goods Orders may have slowed by -0.2%, same as the prior month.

- Dallas Fed President Robert Kaplan, Minneapolis Fed President Neel Kashkari, and New York Fed Boss John Williams will all speak today.

- BJ’s Wholesale Club and Kroger will announce earnings before the bell while ADT and Costco will deliver results after the close.

Want more?

If you want to know more about how the VIX works, read one of my past notes which gives details here:  https://www.siebertnet.com/blog/index.php/2018/11/21/cold-turkey/

daily chartbook 2020-03-05