Signals Cross in U.S. Stocks as Volatility Doubles on OilCallie Bost
Signals from energy and bond markets are rattling the nerves of stock investors.
Daily swings in equities have doubled from last year to 1.1 percent in 2015 as oil falls the most since 2008 and yields on 10-year Treasuries slide toward 1.9 percent. The stress has pushed a Bank of America Corp. gauge of hedging costs in bond, stock, currency and commodity markets to an 18-month high.
“There’s a little bit of a different feel to the volatility,” Alan Gayle, who helps oversee about $45 billion as a senior strategist at Ridgeworth Capital Management, said by phone. “The chance of all of these divergent forces coming together is something that could be a problem.”
Concern about the impact of plunging oil on investment and what falling yields signal about economic growth are testing the resilience of U.S. stocks, where a strategy of buying on weakness worked in 2014 better than any time in six years. Today’s rally in the S&P 500 comes after the index suffered its fifth decline of 4 percent or more since last January.
“Market momentum has turned softer,” said Gayle. “I’m not buying every dip.”
The S&P 500 slid 0.6 percent to 2,016.86 at 2:05 p.m. in New York, erasing an earlier gain of 1.4 percent, as commodity shares sank with the price of oil and copper to offset a rally among technology shares. The Chicago Board Options Exchange Volatility Index slid 3.8 percent to 18.86.
The VIX, a gauge of demand for protection against losses in U.S. equities, has fluctuated more than 10 percent in three trading sessions this year.
U.S. stocks slid 1.6 percent from Jan. 9 to Jan. 12 as data showing a decline in American wages and oil prices dropping to a five-year low prompted concerns of an economic slowdown. Earlier last week, equities soared 3 percent in two days after minutes of the Federal Reserve’s last meeting indicated no change in their approach to rates.
“This market has been very difficult to explain day-to-day,” Walter Todd, who oversees just over $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital Associates LLC, said by phone Jan. 12. “Oil continues to drop 2, 3, 4 percent, day in and day out, and people are scratching their heads saying, ‘Why is the 10-year yield below 2 percent if the economy is doing so well?’”
U.S. gross domestic product grew at a 5 percent annual rate in the third quarter, the biggest advance in 11 years, the Commerce Department said on Dec. 23. Consumer spending is poised to grow in 2015 as stronger employment and lower gasoline prices boost household buying power.
As the S&P 500 trades about 2.3 percent below a record high, other markets reflect lingering concerns. Tumbling oil prices have crimped the outlook for inflation, depressing yields on 10-year U.S. Treasuries to the lowest in about 20 months on Jan. 12.
Bank of America’s Market Risk Index, derived from implied volatilities in stocks, Treasuries, currencies and commodities, touched the highest level since July 2013 on Jan. 7 and has remained around there since.
Options on an exchange-traded fund tracking crude futures cost around the most in three years. The CBOE Oil ETF VIX Index, derived from hedges on the U.S. Oil Fund LP, climbed 55 percent from Dec. 5 through yesterday. Bank of America Merrill Lynch’s MOVE Index, which measures swings in Treasuries based on options, was 31 percent above its 12-month average of 62.28.
The recent gains in the market after rapid retreats show investors are buying in hopes they don’t miss another rally in a bull market approaching its seventh year, according to Steve Sosnick at Timber Hill LLC. Since 2009, U.S. equities have endured 30 declines of 4 percent or more while tripling in value.
“There are days where oil declines and it matters, and there are days when oil declines and it doesn’t,” Sosnick, equity risk manager at Timber Hill, the market-making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc., said by phone Jan. 8. “We’re getting these V-shaped bottoms, which means people are still more afraid to miss a rally than they are about a significant decline or correction.”
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