If you've observed heightened volatility in stock movements following earnings reports, your perception aligns with the data, revealing a noteworthy trend in the financial markets. The S&P 500 index achieved a historic close above 5,000 last Friday, typically signaling a decrease in volatility. However, the CBOE Volatility Index (VIX), commonly referred to as the market's fear gauge, has exhibited an upward trajectory in recent months, counter to the anticipated decline in volatility.
Despite the S&P 500's ascent, there seems to be a growing skepticism on Wall Street. This skepticism contributes to increased investor apprehension when companies report unexpected news, even if it is positive. Matt Amberson, Principal at Option Research & Technology Services, describes the current market sentiment as "climbing a wall of worry," with more concerns prevailing than warranted by the market's performance.
As of Monday morning trading, the S&P 500 displayed marginal changes, while the VIX rose by more than 4%. Amberson attributes investors' lingering concerns to economic uncertainties and the ambiguity surrounding interest rates, creating a volatile environment, especially regarding corporate earnings.
Remarkably, after approximately two-thirds of S&P 500 companies reported fourth-quarter results, the average one-day post-earnings move, in either direction, stood at 4.6%, surpassing the one-year, five-year, and ten-year averages. This significant deviation in stock movements extends beyond smaller market capitalizations to include even technology giants with trillion-dollar market caps, marking an unusual phenomenon in the financial landscape.
The options market, acting as the Wall Street counterpart to Las Vegas odds makers, has also experienced anomalies. Straddle option strategies, which rely on volatility rather than direction, involve simultaneous purchases of bullish (call) and bearish (put) options with the same strike prices. Historically, the options market has effectively priced straddles, creating a balance that entices investors while still leading to losses for buyers. However, recent market dynamics have disrupted this equilibrium, with the average post-earnings stock move surpassing the straddle prices by 129%, consistently exceeding 100% since the beginning of the earnings season.
This deviation from historical norms suggests a unique and uncertain market environment, where overall volatility remains relatively low, yet investors are notably jittery about the future outlook. The simultaneous increase in both the S&P 500 and the VIX, reminiscent of a trend observed last summer, raises questions about a potential market reaction in the coming months. Comparisons to historical data indicate that during similar periods, the S&P 500 experienced a short-term pullback, falling 8.6% over three months through October.
Market analysts, such as Craig Johnson, Chief Market Technician for Piper Sandler, point to declining breadth, indicating a reduced participation in the market rally. This observation leads to speculation about a possible "meaningful" pullback in the range of 5% to 10%, akin to the correction witnessed last fall. Johnson clarifies that this perspective does not signal a bearish outlook on the stock market but suggests a potential correction in response to the prevailing market conditions. As the financial landscape continues to evolve, market participants navigate through an intricate balance of optimism, skepticism, and anticipation of potential corrections.
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