By the time the bell clanged on Friday, the S&P 500 (SPX) had recaptured 21 points and more than 1%, gaining across all 10 sectors. At the same time, the CBOE Volatility Index (VIX) eased 1.48 to 14.68, capping a rocky, negative week that ended with a forecast-beating September jobs report, including the lowest unemployment rate since 2008. The focus now shifts to earnings, but macro events that include Hong Kong unrest and technical gaps such as lagging small-cap stocks could stir sentiment and volatility in the days ahead.
VIX, the market’s “fear gauge,” hit a high of 19.4 earlier last week (see figure 1) and after several days of back-and-forth action, is now midway within its six-month range (March high of 18.22 and a July low of 10.28). Early-week demand for the relative “safety” of government debt tipped the benchmark 10-year Treasury yield back below the psychologically significant 2.5% before the bond market cooled later in the week.
Volatility’s next move seems to hinge on a number of factors. Although investors seemed to find solace in September job figures, VIX has been creeping higher in recent weeks as investors grapple with a host of news items from home and abroad. Geopolitical turmoil is one factor, yes, but another is the continued divide in monetary policy among the global giants due to spotty economic growth.
Figure 1: The CBOE Volatility Index (VIX) fell below 15 on Friday after flirting with 18 and a... [+]
Dollar Power
Policy uncertainty and resulting gyrations in the currency market could matter in the stock space, too. The euro is taking it on the chin and dropped to 52-week lows of 1.25 versus the dollar on Friday. The buck also scored strong gains against the yen late last week; the USD/JPY currency pair sits near 52-week highs.
Dollar strength is likely to impact earnings of many of the large multinationals that dominate the S&P 500. Upcoming earnings should be scrutinized for currency-related warnings.
Results from
Fed Decoder Ring
The economic calendar is light, but the release of minutes (on Wednesday afternoon) from last month’s Federal Reserve meeting might carry market impact. Recall that at the September 17 meeting, Fed officials maintained the “considerable time” language in their post-meeting statement, an indication to markets that policy-makers remain interested in a go-slow approach to raising interest rates. The minutes from that same meeting might offer clues regarding the Fed’s next move and, given Friday’s strong jobs numbers, rate hike concerns could soon become a theme once again.
Don’t forget that the latest TD Ameritrade Investor Movement Index® (IMXSM) will be released Monday (refresher: IMX tracks holdings/positions, trading activity, and other data from a sample of our 6 million funded client accounts). Let’s see what stocks this group of retail investors had a taste for during volatile September.
Beyond that, the protests in Hong Kong, headlines related to the Ebola outbreak, and further signs of economic weakness in China and Europe (in other words, all the news items that caused an uptick in volatility in September) could potentially resurface and, along with pre-earnings jitters, keep a bid under market volatility.
Stock-market bulls would like to see the SPX hold 1950 as support and get above 1980 in order to challenge 2000 again. All told, there is certainly a lot to mull over and plenty of reason to stay vigilant as we navigate through the historically volatile month of October.
Good trading,
JJ
TD Ameritrade, Inc., member FINRA/SIPC. Commentary provided for educational purposes only. Past performance of a security, strategy, or index is no guarantee of future results or investment success.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
