The turmoil in US stocks has pared the market’s internal gauges for a sign of relief to investors.
Worries of war, inflation and an economic downturn dragged the S&P 500 into its first 100 trading days in a year’s worst since 1970. With the markets correcting somewhat over the past week, investors have been tracking everything from option bets to surveying investor sentiment to assess when volatility may end.
Lindsey Bell, chief market and currency strategist at Ally Financial, said in a recent note that four of the five main indicators they track are below extreme levels, suggesting that there is more room for further downside. They include:
Market volatility is below pre-sell levels
The Cabo Volatility Index, or VIX, is known as Wall Street’s “fear gauge” because it measures the prices of S&P 500 options, which investors use as a security for their portfolios. Although the gauge has jumped this year, it remains “far below the levels of previous bear markets,” said Nancy Tengler, chief executive and chief investment officer at Laffer Tengler Investments.
Options traders worry moderate
Another gauge of fear in the options market has risen, but not to an extreme. According to FactSet, the ratio of put options to call options recently peaked at 1.33, well below the high of 1.7 hit in late 2018 and 1.8 hit in early 2020. A put provides the right to sell shares at a specific price by a specified date, and can be used to profit from a market downturn. Calls confer the right to buy shares by a specified date. Mark Hackett, head of investment research at Nationwide Investment Management Group, said the ratio can help determine the timing of investors’ surrender, which could mark the end of the decline. When it reaches a peak, it’s a sign that “well, today is the day everyone has given up,” he said.
Many stocks are still trading above the 200-day moving average
Traders track a rolling average of a stock’s performance over 200 days as a means of determining how the latest price swings compare to longer-term trends. When short stocks trade above the moving average, it shows that investors are increasingly pessimistic. Currently, about 30% of stocks are above that moving average, which is still higher than previous time levels of market tension, suggesting more room for decline, according to Ally.
Bond spreads still relatively tight
Some on Wall Street track the additional yield, or spread, that investors seeking to hold corporate bonds instead of ultrasafe Treasuries tend to rise for fear of recessions and defaults. The spread has recently ticked higher, but is well below the recent high it hit in 2020. “The spreads are widening, but they are nowhere near where they were in panic mode in the last massive sell-off,” said Dan Morgan, a senior portfolio manager at Synovus. trust company
Investors’ outlook: Dreary
Wall Street often tracks the sentiments of individual investors, believing that when they turn most pessimistic, it’s time to buy—and they’ve been down quite a bit lately. Many people use the American Association of Individual Investors’ weekly survey, which asks investors to predict where the market is going in the next six months. According to Ally, when the bears outperform the bears by more than 30 percentage points, it is a sign that the worst of the downtrend has passed.