The Crossroads

Following a few weeks of high volatility, the downside trajectory of the markets seems to have subsided.  The objective measure of this is the volatility index or VIX.  The chart below shows the explosion of this index in the middle of February, ascending to levels not seen since late 2008 during the banking panic that roiled the markets then.  At that time this “fear index” as it’s sometimes referred to, climbed to a reading of just under 60 and this was exceeded on this last selloff reaching a high of 82.


Clearly, this panic was more extreme than the last selloff and it implies that conditions  perceived by participants are much worse.  We can observe that there are divergences showing in the daily momentum of VIX which gives hope that the worst is past.  Less sanguine is the monthly chart shown below in which the momentum stats have not decidedly turned over. This will not happen unless VIX continues to abate.  Unfortunately there is no absolute except zero on the downside.

vix monthly

In 2008, severe stress was centered primarily in the banking sector whereas in today’s environment, the threat is much more existential according to the global response.  Of course, we don’t know if these fears are well founded, but the speed and extent of the selloff indicates that much is unknown to the market.  Nevertheless, the daily media patter of this crisis, framing it in the most dire terms, serves to continue to make participants nervous.

While there are coordinated efforts to contain the damage, markets have yet to express confidence that a clear resolution is at hand.  In the past week, extreme volatility was evident in stocks as prices swung from optimism to pessimism intraday in seemingly random fashion.  Historically, this tug of war between optimists and pessimists means that a change in direction is at hand and that’s the only reference we can use to logically assess the market’s status.  Over the days ahead, gauging advance-decline statistics will give us further evidence.

There have been pockets of divergence showing in many sectors of the market and it bears monitoring the relatively stronger groups for rebounds.  At the other extreme, industries that have suffered the worst of the selloff, such as airlines, hotels and cruise companies are candidates for regression trades. These are for aggressive traders only of course.

Using tools that we’ve discussed earlier will provide entry points with definable risk. The fullness of the selloff has ravaged heretofore stable businesses and thus investors must be cautious about some of them surviving this market panic since price movements are not abstracted from value.  We cannot just assume that since something is ‘cheap’ that it is necessarily a compelling value. If markets discount the future, then many of the heavily battered stocks many indicate that any recovery may be a long time coming…if at all.

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