Volatility is on the rise. During the first few days, the CBOE Volatility Index ($VIX) jumped from 14.48 to 18.00 (through late Wednesday). A spike of that magnitude is relatively uncommon and only occurs when traders become nervous or even fearful regarding the market outlook. This type of psychology stands in stark contrast to the situation just a few weeks ago. At that time, investors were predominantly bullish and optimistic regarding the outlook for stocks. What could have caused this notable shift in market sentiment? One reason, perhaps, is due to the fact that the latest decline has caused selling across every sector of the stock market.
Stocks have fallen sharply during the past few days amid worries that the twelve-month rally, that drove many sectors of the market to new highs, has pushed valuations to extremes. Midday Wednesday, the Dow Jones Industrial Average ($INDU) was down 84 points and the Nasdaq Composite ($COMPQ) had fallen 15. For the week, the Dow has now given up more than 200 points, while the Nasdaq has stumbled for a 65 points loss.
The table below shows the volatility and performance of a variety of sector and market indexes. The list is sorted by volatility, with the groups showing the greatest volatility near the top of the list. For example, the AMEX Airline Index ($XAL) is on the first row. It has the greatest 30-day Statistical Volatility [SV], which is a measure of the volatility of the daily closing prices during the past thirty days. Moving down the table, we see that the three-day sell-off has created losses across all sectors of the market. Transportation, cyclicals, technology, and biotech stocks have been among the biggest casualties.
Statistical Volatility (SV)
Sector Index Symbol 50-day 30-day 20-day Performance (March 8-10)
AMEX Airline Index XAL 32% 33% 30% -5.45%
AMEX Networking Index NWX 38% 31% 26% -5.97%
PHLX Semiconductor Index SOX 31% 30% 29% -4.93%
AMEX Disk Drive Index DDX 34% 29% 28% -3.23%
MS Biotechnology Index MVB 25% 25% 23% -5.42%
CBOE Internet Index GSO 24% 23% 24% -5.03%
CBOE Ten-Year Rate Index TNX 24% 23% 23% -2.51%
AMEX Broker/Dealer Index XBD 21% 23% 22% -4.48%
Russell 2000 Small Cap Index RUT 17% 19% 17% -3.05%
MS Cyclical Index CYC 15% 15% 13% -5.68%
S&P MidCap Index MID 11% 13% 12% -2.70%
PHLX Bank Sector Index BKX 10% 10% 8% -1.60%
AMEX Drug Index DRG 11% 10% 8% -2.64%
S&P 500 Index SPX 10% 10% 9% -2.18%
Dow Jones Industrials DJX 10% 9% 9% -2.14%
Dogs of the Dow MUT 11% 9% 9% -2.71%
MS Consumer Product Index CMR 8% 8% 7% -1.05%
Correlation between 30-day SV and 2-day Return
-75.21%
There has also been an interesting (negative) correlation between return and volatility. The groups with the greatest volatility have suffered the greatest percentage losses during the three-day decline. Those sectors with the lower volatility have fallen, but the percentage losses have been smaller. For instance, the MS Consumer Product Index ($CMR) is down only 1%, and its 30-day Statistical Volatility is 8%. So, the consumer product index has the lowest 30-day SV and has suffered the smallest percentage decline.
So, in the end, the latest wave of selling has caused a sharp spike in volatility and the VIX, but it may be nothing more than a normal correction following the strong gains during the past twelve months. Although all sectors of the market have suffered losses, the higher volatility groups are taking the brunt of the punishment. This is what one might normally expect during a correction. Moving forward, the heavy selling will eventually subside and, at that point, investors will once again begin to discriminate between specific stocks and sectors (because indiscriminate sell-offs don’t go on forever). Once this happens, trading will become more orderly and volatility should once again revert back to normal, or low, levels.
Frederic Ruffy Senior Writer & Index Strategist Optionetics.com ~ Your Options Education Site Visit Fred Ruffy’s Forum
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