Traders on the NYSE floor, August 8, 2022.
Source: Reuters
According to Nicholas Colas, co-founder of Data Trek Research, a key measure of stock volatility is providing clues that investors should be wary of the market’s recent bull run.
The CBOE Volatility Index hit its most recent mid-June high and is currently trading around its long-term average of 20.
At the same time, the top five S&P 500 sectors by market capitalization have moved largely in increments of up and down with the index.
Taken together, the movements are the opposite of how typical market rallies have played out over the past few years and offer warning signs that rally, brought the index up about 15% off the mid-June low, is doubtful.
“Compared to previous times when VIX is at a similar level, the correlation figure is lower. But we’re here anyway,” Colas said in its daily newsletter to clients on Wednesday night. “VIX closes at 20 [Wednesday] is promising something the stock hasn’t really delivered yet, namely a healthy separation of industry price action from the overall market. “
According to Colas, when looking at the 30-day daily returns over the past four years for the tech, media services, consumer, financial, and healthcare industries, these sectors run in tandem with gains in The S&P 500 69% of the time, according to Colas.
In a large part of those times, a high degree of correlation coincides with a bear market and vice versa. As a result, current conditions – the 30-day tracking average of correlations running around 84%, low VIX, and a large rally in stocks – have not followed typical market patterns.
Markets have bounced back strongly from mid-June lows as investors have become more comfortable with corporate earnings and hope that the Fed will not have to introduce draconian measures. increase the rate to control inflation.
But Colas thinks investors should be wary. A market that has become complacent in the face of many of the challenges facing corporate America, including slow growth, high inflation and tighter policies, could be vulnerable.
“We have a standing recommendation all year to consider buying stock when the VIX hits around 36 (two standard deviations from the mean) and up slightly when it’s near 20,” Colas wrote. “We’re at the end of the day. As we stay bullish, stocks look overdeveloped here.”
