VIX Not Budging as Stocks Drop Anew in Week of S&P 500 Setbacks

  • The fear gauge has been above 25 for 11 consecutive days
  • Stocks lose 3 percent in five days as Fed weighs on sentiment

Want evidence this selloff isn’t like the others? Consider that the VIX, the market’s fear indicator, has now spent 11 straight sessions above 25 -- a level that before August it had touched on just five days since 2011.

Or the Standard & Poor’s 500 Index, which through Friday has swung up or down an average of 2 percent a day for more than two weeks. Prior to Aug. 20, the 2015 average was around 0.6 percent. The Dow Jones Industrial Average has suffered declines of more than 270 points in five of the last 12 sessions, the biggest cluster of selloffs since the summer of 2011.

Chaos is proving tough to shake in an American equity market where concerns that economic growth is slowing in China is alternating with dread about the first Federal Reserve interest-rate increase in nine years. Buy-the-dip is broken, at least temporarily, and fatigue is setting in among traders at the start of what has historically been the worst month of the year for equities.

“People are digging in for the market gyrating and volatility to hang around,” said Andrew Wilkinson, chief market analyst at Interactive Brokers LLC in Greenwich, Connecticut. “For a long time people were having good years, and now they’re getting it handed to them,” he said. “For anybody going through a broker or someone that had moved to start a hedge fund or something, this is a baptism by fire.”

The S&P 500 lost 3.4 percent in the week, the second-biggest retreat since December behind the 5.8 percent plunge it suffered in the five days through Aug. 21. Almost 550 points were shored off the Dow average, its second-worst point drop of the year. The Nasdaq Composite Index dropped 3 percent, erasing its gain for 2015, while small-caps in the Russell 2000 Index declined 2.3 percent.

Within the S&P 500, every industry is showing losses since the gauge peaked in May. The worst are declines of 18 percent or more in energy and commodity producers. The latest week’s biggest tumbles came in utilities, health-care and financial companies, which each lost at least 4.2 percent.

Joy Global Inc., the world’s biggest manufacturer of underground mining equipment, slid 22 percent over the five sessions after cutting its earnings forecast. Netflix Inc. continued to be the best stock in the S&P 500 this year even as its 16 percent plunge in the week extended the loss since Aug. 6 to 22 percent.

Creating Volatility

The S&P 500 has fallen more than 1 percent in six of the 12 days through Friday, including the three biggest single-day plunges since November 2011. At Friday’s close of 27.80, the Chicago Board Options Exchange Volatility Index sat about 90 percent above its average level during the three years through July.

“You try to ignore it, but these larger swings create volatility,” Ron Anari, the Jersey City, New Jersey-based senior vice president of trading at ICAP Plc, said via phone. “The equity markets right now are strictly focusing on what the Fed’s going to do and they need to come to grips with the fact rates are rising regardless of current conditions.”

Stubbornly high levels in the VIX are both the mark of anxiety among traders and the harbinger of more to come, if you believe a theory that has been gaining traction in markets of late. Research from JPMorgan Chase & Co. estimated quantitative investment funds that need to unload stocks when volatility goes up may contribute to another $100 billion of “price-insensitive” selling in the next few weeks.

“We expect elevated volatility and downside price risk to persist,” Marko Kolanovic wrote in a note Sept. 3. “In our view, the risk/reward for equity investors remains in favor of waiting, rather than being fully invested, until there is more clarity from macro data and central banks.”

Whether he’s right or not, bulls would probably prefer if Kolanovic published fewer notes. In the hours after he warned of quant-fomented crashes on Aug. 27, a 2.5 percent rally in the S&P 500 briefly narrowed to 0.5 percent. A similar deflation occurred Thursday as the index gave up almost all of a 1.3 percent advance.

Thursday’s reversal turned into deeper losses Friday with the release of data on U.S. employment, igniting a 272-point swoon in the Dow and a 1.5 percent drop in the S&P 500. The benchmark gauge has fallen an average of 1.1 percent in Septembers since 1928, the worst performance of any month, data compiled by Bloomberg show.

The jobs report is the last major data point before the Fed meets on Sept. 16-17 to discuss interest rate policy. Investors raised bets on a September liftoff to 30 percent from 26 percent before the jobs data, while that’s still less than the 48 percent odds predicted before China devalued the yuan on Aug. 11.

Even with rates taking center stage, investors are keeping an eye on developments in China, as concerns continue to mount over how much the country’s slowdown will weigh on the global economy. China’s stock market was closed on Thursday and Friday and will reopen Monday.

“The market will continue to be volatile,” said Walter Todd, who oversees about $1.1 billion as chief investment officer for Greenwood Capital Associates in South Carolina. “There’s a lot of anxiety about that first rate hike in almost 10 years.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE