EXPECTATIONS LIKE THIS ONLY ONE OTHER TIME
We have data for the Volatility Index going back to 1990. There has only been one other time in the last 30 years that had a VIX reading as high as the close on March 12, 2020. The rare VIX reading appeared on October 24, 2008, during the height of the financial crisis.
Was the market close to a bottom on October 24, 2008? Yes, an intermediate-term bottom. Was the market near the final bottom? No, not even close. The first set of charts below show a 14.71% snapback move that occurred after October 24, 2008; the rally ended on November 4, 2008. That turned out to be a bounce and it was all given back and then some. The S&P 500 eventually dropped 23.95% below the S&P 500 close on October 24, 2008 (point A).
HOW COULD THIS BE HELPFUL?
It helps us remain open to two important concepts: (1) typically, sharp multiple-day or multiple-week rallies occur from such lopsided market conditions and (2) volatility expectations say it is prudent to understand that much lower lows are still possible. We all know 2020 is unique and will follow a unique path.
What is the VIX saying? The reading on March 12, 2020 is saying 30-day expectations for stock market volatility have only been this high one other time. That one other time is not a warm and fuzzy period. To the contrary, having gone through the financial crisis in real time, I have often thought what a great experience it was to see maximum economic and systemic concerns. Typically, maximum concern levels are reached for serious fundamental reasons. The blurb below comes from Investopedia:
The Volatility Index, or VIX, is a real-time market index that represents the market's expectation of 30-day forward-looking volatility.
Typically (not always), a near maximum expectation for 30-day market volatility does not occur in a fundamental and technical environment that places high odds on making THE bottom. An intermediate-term bottom in the coming days and a powerful percentage gain would not be shocking. In the 2008 case:
A sharp countertrend rally occurred within days.
Much lower lows were still ahead.
An excellent entry point surfaced after the next big leg down.
NO PREDICTIONS, NO FORECASTS
All outcomes are possible in 2020. Like the current reading on the VIX, price action over the past few sessions has a very concerning look and feel. As always, we will head into Friday’s session with an open mind about all outcomes. The market is near two common institutional guideposts: the S&P 500 200-week moving average and the 250-week moving average. A weekly close above the 200-week, which would require a green session Friday, would improve the odds of some intermediate-term stability.
MORE DETAIL IN THIS WEEKEND’S VIDEO
If Friday turns out to be another sharp decline, it might be helpful for clients to add up their exposure to cash/bonds/gold and compare it to their stock exposure. This ratio speaks to our exposure if the S&P 500 does indeed make a much lower low as it did in the 2008-09 case.