Commenting on the Volatility Index hitting a multi-year high and today’s trading Gorilla Trades strategist Ken Berman said:
Friday’s session was perfect conclusion of the week when 1000 point moves in the Dow became the norm. Volatility continued to reign supreme on Friday and the Volatility Index (VIX) topped the 50 level in over two years while the yield curve collapsed, but stock bounced back in late trading, which could mean that the worst of the correction is behind us.
Q4 2019 hedge fund letters, conferences and more
The ExodusPoint Partners International Fund returned 0.36% for May, bringing its year-to-date return to 3.31% in a year that's been particularly challenging for most hedge funds, pushing many into the red. Macroeconomic factors continued to weigh on the market, resulting in significant intra-month volatility for May, although risk assets generally ended the month flat. Macro Read More
Major Indices Surge Higher
Stocks had yet another tumultuous session on Friday and even though the major indices surged higher in the last hour of trading, they all finished with deep in the red. The Dow Jones Industrial Average (INDEXDJX:.DJI) was down 257, or 1.0%, to 25,865, the Nasdaq (INDEXNASDAQ:.IXIC) lost 163, or 1.9%, to 8,576, while the S&P 500 (indexsp:.inx) fell by 52, or 1.7%, to 2,972. Decliners outnumbered advancing issues by a 5-to-1 ratio on the NYSE, where volume was well above average yet again.
We had one of the most volatile weeks on Wall Street since the end of the financial crisis over ten years ago, as investors tried to gauge the economic effects of the coronavirus outbreak. The Fed tried to calm markets by an emergency 0.5% rate cut on Tuesday, but that, Joe Biden’s Super-Tuesday-comeback, and even the International Monetary Fund’s (IMF) $50 billion coronavirus package weren’t enough to stop the selloff in global risk assets. The week ended on a negative note, and even though most stocks closed above their recent lows, volatile trading will likely continue in the coming weeks.
Despite the mounting economic worries, the key indicators leaned bullish yet again this week, with especially the government jobs report blowing away expectations on Friday. Non-farm payrolls surged higher by 273,000, while wage growth remained strong and the unemployment rate ticked lower unexpectedly to 3.5%. The ISM non-manufacturing PMI was also very strong, just as construction spending, but the manufacturing sectors sent a few warning signs. The ISM manufacturing PMI inched closer to the 50 level again, while factory orders also missed the consensus estimate, and the IDB/TIPP economic optimism number was lower-than-expected as well, due likely to the virus-related fears.
The Volatility Index Hit A New Muti Year High
The technical picture continues to be bearish as far as the short-term time frame is concerned, but investors still don’t have a good reason to think that the bull market is over, despite the spike in volatility. The S&P 500, the Nasdaq, and the Dow are now all well below their 50-day averages, with only the tech benchmark holding up above its 200-day moving averages. Small-caps continue to show relative weakness, and the Russell 2000 was the first index to violate its low from last week on Friday amid the continued exodus pout of risk assets. The Volatility Index hit a multi-year high again due to the wild swings and the high level of uncertainty and it closed near 42 after briefly topping the 50 level on Friday.
Market internals remained weak as small-caps continued to lag the broader market, and the most reliable breadth indicators haven’t shown meaningful positive divergences yet. The Advance/Decline line hit a new low even as the major indices remained above their lows from last week, as decliners outnumbered advancing issues by a 2-to-1 ratio on the NYSE, and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs remained very low on both exchanges, falling to 8 on the NYSE and 16 on the Nasdaq. The number of new lows declined in the meantime, dropping to 250 on the NYSE and 217 on the Nasdaq. The percentage of stocks above the 200-day moving average remained near last week’s levels, closing the week below 30% again.
Short Interests Still Climbing
Short interest continued to climb despite the Fed’s rate cut and the bounce in the major indices as the global risk-off shift weighed heavily on the most-shorted issues. Our previous pick, Sea Ltd. (SE) remained relatively strong this week, even considering its Friday pullback, and since the stock still has a short interest of 44%, it could soon hit new a new all-time high again. Digital Realty (DLR) recovered well from last week’s selloff, and since it still sports a very high days-to-cover (DTC) ratio of 13, its relative strength could be foreshadowing a strong rally. Rollins (ROL) has also been showing encouraging strength this week, and in light of the stock’s DTC ratio of 12, it could be ready to conclude its year-long consolidation.
While we will have a relatively quiet week with regards to economic releases, it’s safe to say that traders won’t be bored, as volatility will likely remain extremely high. The NFIB Small Business Index will be out on Tuesday, the Consumer Price Index (CPI) and the Producer Price Index (PPI) are scheduled for Wednesday and Thursday respectively, while the week will end with the Michigan consumer sentiment number. The Fed could once again be in the spotlight as even though the tgr Central Bank’s next scheduled meeting will be held later this month a lot of analysts expect another emergency move, as soon as after the weekend break. Stay tuned!