Weighing Investor “Fear” Amidst The Market Chop
First we had a collapse in Crude Oil prices. Then we experienced October’s swift stock drop in stocks. These events marked the beginning of an influx of volatility and “chop” into the financial markets. And it’s lasted over 6 months and spanned all asset classes... and it may not be ready to leave us just yet.
Turning out focus to the equity markets, it’s clear that the months long period of price swings is related to investors ongoing battle with price discovery. Basically, lots of investors are “certain” about where the market is going, but their “certainty” is far from unified... and this leads to uncertainty.
This type of environment is hard on active investors of all types, as it messes with psychology and makes everyone a short-term trader, as well as a macro economist all at the same time. But I digress.
Once again we are seeing a bit of a rollover in equities. The early morning low on the S&P 500 is 2045.50. This puts the broad market index 3.5% off the 2015 highs. This could be “just another turn lower” (i.e. 3-5 percent), or it could turn into something worse. On Tuesday, I highlighted a few reasons for the recent rollover in stocks and some levels to watch.
Should the market weaken further from here, there are two good indicators to watch. One is the Volatility Index (VIX) and the second is the Equity Put-Call Ratio. If both are rising, investors tend to be selling stocks and buying more puts than calls. When these hit extremes, they tend to mark near-term bottoms.
Below is the VIX vs the S&P 500. You can see that the recent VIX lows (a sign of complacency) aligned with this (and recent) rollovers within the chop.
So what would be a sign that “fear” has gripped the markets? Well perhaps recent history can be a guideline. Below is a chart showing where the Volatility Index (VIX) and Equity Put-Call ratio have topped (marking market bottoms) over the past 4 years. Note that the Equity Put-Call ratio in the chart below is through yesterday.
The main thing here is to realize that the markets are choppy and that this can be hazardous to our decision making. Stay patient, create and follow a plan, and resist the urge to “go big” or over trade.
Thanks for reading.
Twitter: @andrewnyquist












