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A divergence between the S&P 500 and VIX indexes raises a ‘red flag’ for the stock market rally, former hedge-fund investor Jesse Felder warned.
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It’s a waiting game for investors early on Thursday.
The markets are patiently and somewhat nervously awaiting Federal Reserve Chairman Jerome Powell’s key speech at the Jackson Hole economic symposium later on Thursday. Powell is expected to suggest the central bank will adopt a new framework to allow inflation to run hotter than the present target after a period of missing that goal. U.S. stock futures ES00, -0.25% YM00, -0.26% NQ00, -0.30% pointed lower, implying a 100 point loss for the Dow Jones Industrial Average DJIA, +0.29% at the open. U.S. jobless claims data and second-quarter gross domestic product data will also catch the eye.
In our call of the day, Jesse Felder — author of the popular Felder Report financial blog — said the VIX index was “raising a red flag” for the stock market rally.
The former hedge-fund investor said that typically the stock market and expected volatility — indicated by the VIX index — should move in opposite directions. Any divergence from this, which Felder said has now appeared, can signal “an impending reversal.”
The 2007 stock market top and the 2009 market bottom were both identified by a divergence between the S&P 500 SPX, +1.02% index and the VIX, he said. “Since then we had several bearish non-confirmations that warned of significant corrections. Today, we have another bearish non-confirmation,” the Bear Stearns & Co alumnus said.
The S&P 500 index and inverted VIX index over the past 15 years
The 10-day correlation between the S&P 500 index and the VIX has risen into positive territory, which Felder said can serve as an effective short-term sell signal.
“Right now, this VIX warning signal is flashing again as it did earlier this year and prior to the corrections in the first and fourth quarter of 2018,” he said.
“In short, the options market is sending a message that volatility going forward is likely to be greater than the stock market currently implies. And history shows the options market is usually the only [that] wins this sort of argument,” he added.
The chart
If this chart from Goldman Sachs is anything to go by, then the U.S. dollar bear market may have some way to run, Robeco portfolio manager Jeroen Blokland noted. He said there have only been three U.S. dollar bull markets and two bear markets since the 1970s.
The markets
U.S. stock futures pointed lower ahead of the open, as markets nervously awaited Powell’s speech on inflation strategy. European stocks also slipped, with the Stoxx 600 SXXP, -0.22% down 0.3% and the U.K.’s FTSE 100 UKX, -0.15% falling 0.2% in early trading.
The buzz
TikTok chief executive Kevin Mayer has announced his resignation to employees just three months after taking the job. He said the political environment has “changed sharply” in recent weeks. President Donald Trump has vowed to ban the popular app in the U.S. unless Beijing-based ByteDance sells it.
Hurricane Laura made landfall in southwestern Louisiana early on Thursday, after the National Hurricane Center warned it would bring an “unsurvivable storm surge.”
Rolls-Royce RR, -6.56% stock tumbled as the aircraft engine maker reported a pretax loss of £5.4 billion in the first half compared with a loss of £791 million the previous year. The company said it has agreed a £2 billion loan in the second half to help weather the continuing coronavirus storm.
The Milwaukee Bucks decided to “strike” and not take the floor for their National Basketball Association playoff game on Wednesday, in protest at the police shooting of Jacob Blake in Kenosha, Wisconsin.
Vice President Mike Pence said Democratic presidential nominee Joe Biden can’t be trusted to rebuild the economy or keep cities safe, during a speech on the third night of the Republican National Convention.
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