Trading desks worked with skeleton crews during much of August. In fact, trading volume last week was the slowest since at least 2008 (excluding the holiday-lite end of December) with average daily turnover below 5 billion shares in each of the past nine sessions, the longest stretch for sub-5 billion going back six years, according to
Volatility and volume often go hand in hand, so perhaps it’s little surprise that the average daily move in the S&P 500 over the past two weeks has been just six points. The index produced only one 20-point-plus move last month when it rallied 22 ticks on August 8. Still, the slow grind was enough to push the S&P 500 above 2000 for the first time as upbeat earnings reports and renewed expectations for a slow and steady Federal Reserve policy-change timeline soothed Wall Street.
At the same time, the CBOE Volatility Index (VIX) spent last week pinned near 12 as risk perceptions appear well-anchored at low levels (figure 1), despite geopolitical rumblings in the Middle East and on the Ukraine border. VIX shed 29% for the month of August, the biggest monthly drop in more than two years. Still, VIX did gain 4% last week even as the broader averages advanced. Was that simply the result of a little short-term protection heading into a long weekend and the chance for fresh geopolitical concerns? Or was this a sign of waning risk appetites? It’s something to keep an eye on.
Figure 1: The CBOE Volatility Index (VIX) sits near 12, above its summer low but well off the move... [+]
History Lesson
Trading volumes are likely to pick up again now that Labor Day has passed, however, and volatility might follow. Although past performance is not a guarantee of future performance, it’s interesting to note that from 1990 through 2013, the volatility index moved higher the day after Labor Day on 18 occasions over 24 years, or 75% of the time. Obviously, the market’s “fear gauge” is a far cry from the mid-30s of just a few years ago; it hasn’t been north of 20 since February. Every recent uptick in VIX has been stopped in its tracks, leaving the summer trend decidedly down, including a seven-year low of 10.28 hit in June.
Yet, September and October are sometimes turbulent months for the equity market, and VIX has seen some notable spikes in this span in recent years. In 2013, the index shot up from 13 to a nine-month high of 20 from September 19 to October 8. The market driver at that time? Fears about a potential economic stall as Washington wrangled over the federal budget.
Interest Rate Watch
Of course, it’s impossible to know what news or unexpected event could next rattle investors. Will it be something in an earnings report, in the next batch of economic reports, in a central banker’s speech, or a geopolitical setback that ripples around the globe? That’s why I always urge vigilance and avoiding the complacency that can settle in when markets are relatively quiet and churning to repeat record highs with little fuss.
As for this week, a busy economic calendar concludes with the always potentially market-moving U.S. payrolls and unemployment report due out Friday (figure 2 has the full schedule). Hiring has been trending higher, but hasn’t yet produced the wage inflation risk that might push Federal Reserve members into quicker interest-rate action. I want to see manufacturing, construction, and business services jobs created. In other words, careers not just jobs as the key to job market strength now lies with quality not just quantity. Also on tap: a few noteworthy earnings releases, including
Attention will be on the European Central Bank, the Bank of England, and the Bank of Japan as all three central banks meet to take up monetary policy on Thursday. ECB President Mario Draghi said in a late-August speech that policymakers will use “all the available instruments needed to ensure price stability” and are “ready to adjust our policy stance further.”
The respective decision-making at all three institutions takes on greater importance this time as the potential divide widens between U.S. interest rates and rates across other economic giants.
Good trading,
JJ
Figure 2: Weekly U.S. economic report calendar. Source: Briefing.com.
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