‘Warning Lights’ Flashing, ‘Stars Aligning’ For Elusive Stock Market Correction

In the immortal words of Jackie Moon: “Everybody panic! Oh my God, there’s a bear loose in the Colosseum!

 

If you’ve never seen Semi-Pro, then you have unwittingly deprived yourself of some of the most underappreciated Will Ferrell humor ever produced.

And while it’s probably too early to run screaming like Jackie, it is worth noting that as minuscule as Tuesday’s loss was, it was still the worst day for the S&P in 5 weeks:

SPX2

But as more than a few (dozen) people have noted this morning amid relatively – and it’s all relative these days – steep declines in Japanese and European stocks, it looks like circumstances are conspiring for a correction.

Here’s a bit of useful color from Bloomberg’s Cameron Crise:

Regardless of how seriously you take Donald Trump’s threats to North Korea, price is the ultimate arbiter of the market’s fortunes. The volte-face in U.S. equities yesterday afternoon left the S&P 500 chart with a clear reversal pattern, as the index made a new (all-time) high before closing under the previous day’s low.

SPX

Coming on the heels of the key reversal in the NDX a couple of weeks ago, the warning light is now flashing amber if not red.

What will be interesting to monitor is whether single stock vol increases, or whether an uptick in index volatility is just an overdue adjustment in correlations.

The VIX is now up a couple of vols from Monday’s close with futures down around 1.2% on a peak to trough basis. That looks pretty well priced to me. Over the last six months a two vol change in VIX has required a change of about 16 points in SPX cash; that would put the index at 2464, which is where the futures are currently trading. With larger magnitude moves we should expect that linearity to break down a bit.

Over the last five years, the SPX has had to fall about 7.5% for the VIX to double. That might be a big ask in the current environment, but the stars do seem to be aligning for a modest further pullback in stocks at the very least. 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s