Surging VIX Shakes Bulls as S&P 500 Charts Go Haywire: Options

By Joseph Ciolli, Callie Bost and Oliver Renick

Photographer: Martin Leissl/Bloomberg

European Central Bank President Mario Draghi said there are signs the recovery is losing momentum.

Related

• Ed Yardeni: Central Banks Starting to Lose Credibility
• Fischer: ‘Considerable Time’ Is From 2 Months to a Year
• Investors See First ECB Rate Rise by 2017, Draghi Says

This week’s vortex in equities is a sign of things to come for Donald Selkin, the chief market strategist for National Securities Corp.
Three days of Standard & Poor’s 500 Index swings exceeding 1.5 percent have sent the Chicago Board Options Exchange Volatility Index up 21 percent since Oct. 6 to 18.8, a level not seen since February. About $800 billion has been erased from U.S. equities in three weeks as the average size of daily moves in the S&P 500 almost doubled.
The surging VIX, which usually moves in
the opposite direction as the S&P 500, is “a dangerous sign because we’ll have broken through some resistance,” Selkin, whose firm oversees about $3 billion, said by phone. “In a sense, if we don’t hold here, then we could see the next resistance level around 21, which would take us down another couple hundred points.”
Losses in the S&P 500 since it reached a record Sept. 18 now match declines in the last two U.S. selloffs, in July and April. The gauge decreased 2.1 percent to 1,928.21 yesterday after European Central Bank President Mario Draghi said there are signs the recovery is losing momentum.
As was true two days ago, declines were larger in small-cap and transportation stocks. The Russell 2000 extended its retreat from its March high to 11.6 percent and the Dow Jones Transportation Average tumbled 2.4 percent to a two-month low.
For traders guided by price charts, a bigger test for the S&P 500 is looming about 1 percent below its level now, at 1,909, according to Ryan Detrick, a Cincinnati-based strategist at investment research firm See It Market. That’s where the index bottomed on Aug. 7 before starting a 5 percent rally.

‘Broken Down’

“That August low is a big level, and you have the 200-day moving average down there as well,” at 1,905, he said. “We’re getting to the area where we’ve seen bounces before. The area down there looms large, and with small-caps already broken down, you’d like to see large-caps gain some kind of footing.”
Bears were in control yesterday just 24 hours after concern about European growth voiced in Federal Reserve minutes spurred the biggest rally of the year. The day before that, the S&P 500 dropped 1.5 percent after the International Monetary Fund lowered its forecast for global growth and said the ECB may be forced to do more to stave off deflation.
“People are flailing around not knowing what they want,” said Patricia Edwards, managing director of investments at US Bank Private Client Reserve in Seattle. “We had the IMF saying we need to spend and spend and six different Fed officials speaking as well as Draghi. We’ve got a lot of people opining about things without real proof of which way we’re going.”

Unprecedented Calm

The toll on sentiment is being exacerbated by the nearly unprecedented calm that had enveloped markets for most of the year. Seven trading days into October, the S&P 500 has posted five single-day moves exceeding 1 percent. The market went without any swings of that size for 62 days in May, June and July, the longest stretch since 1995.
“It definitely has not been a fun ride,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said by phone. “Volatility coming back into the market is a direct correlation to the tapering ending. This is what it used to be like before the government was in the market.”
All 10 S&P 500 groups dropped at least 0.9 percent, with energy stocks plunging 3.7 percent to pace losses. The S&P 500 dropped 40.68 points. The Russell 2000 Index sank 2.7 percent, the most since April. The Dow Jones Industrial Average tumbled 334.97 points, or 2 percent, to 16,659.25, trimming its gain this year to less than 1 percent.

Rising Volume

Over the last 15 days, the benchmark gauge for American equities has posted an average daily change of about 0.9 percent, compared with 0.48 percent in 2014 before that. Volume has risen correspondingly, with an average of about 7 billion shares changing hands each day on U.S. markets through yesterday, compared with 6.2 billion the rest of this year.
Equities tumbled 3.9 percent between July 24 and Aug. 7, almost 4 percent between April 2 and April 11 and 5.8 percent from Jan. 15 to Feb. 3. Each time, the losses were erased within about a month. During those stretches, the volatility index peaked at 17.03 twice, and at 21.44, the highest level reached since December 2012, on Feb. 3.