foxex: Late-day Surge Lifts S&P 500 Again

Chart Advisor | INVESTOPEDIA

Focus on the Price

By John Jagerson, CFA, CMT

Thursday, December 27, 2018

1. S&P 500 surges in final hour

2. S&P 500 heatmap stabilizes in green

3. Short-term fears trump longer-term concerns

Major Moves

When the stock market makes major moves one day, it often takes a break and makes much smaller moves the next day.

In the aftermath of the S&P 500's largest single-day point surge (116.6 points) yesterday, the index meandered in a tight range for most of the day before shooting higher into the closing bell.

The S&P 500 added another 21.13 points (+0.86%), closing at 2,488.53, today while the Dow Jones Industrial Average soared another 260.4 points (+1.14%), closing at 23,138.80. The yield on the 10-year Treasury (TNX) dropped even farther below 3%, closing at 2.74%.

S&P 500 Heatmap

The S&P 500 enjoyed not only its largest one-day point increase yesterday but also its first experience of seeing more than 500 of its component stocks close higher for the day.

I know, it seems weird to say that more than 500 of the S&P 500's stocks closed higher because, based on the name, you would think the index only has 500 stocks in it. However, because five stocks – like Alphabet (GOOGL) (GOOG), Discovery Communications (DISCA) (DISCK) and News Corp (NWSA) (NWS) – have multiple share classes, they each get two listings in the index.

If you were looking at a heatmap of the S&P 500 yesterday, all you would have seen was a sea of green. Today was a different story.

In early trading, the S&P 500 heatmap was a field of nothing but red. By the closing bell, the heatmap had reversed once more, showing mostly green with a few islands of red.

This is a sign the market is returning to normal. Most days on Wall Street see some stocks go up while other stocks are going down. Rare are the days when nearly the entire index is up or down.

Watch for more moderation ahead.

Read more:
Breaking Down a Heatmap

How is the value of the S&P 500 calculated?
Why do investors use the S&P 500 as a benchmark?

Source: finviz.com

Risk Indicators

When traders look at volatility indexes, they tend to focus on the CBOE Volatility Index (VIX). The VIX is a measurement of the anticipated volatility being priced into S&P 500 options for the next 30 days.

Sometimes 30 days isn't a long enough view. When a longer-term outlook is needed, traders look to the CBOE S&P 500 3-Month Volatility Index (VIX3M). The VIX3M is a measurement of the anticipated volatility being priced into S&P 500 options for the next 3 months, or 90 days.

Typically, the value of the VIX3M is higher than the value of the VIX because the market has a greater chance of making a larger move if you give it three months to complete the move rather than just one month.

Surprisingly, there are times when traders will push the value of the VIX up higher than the value of the VIX3M because they are acutely concerned the market is going to make a dramatic move in the short-term.

You can identify these moments by creating a relative-strength chart between the VIX and the VIX3M.

When you divide the value of the VIX by the value of the VIX3M under normal market circumstances, you get a value less than 1 because the value of the VIX is usually less than the value of the VIX3M.

When you divide the value of the VIX by the value of the VIX3M under stressed market circumstances, you get a value greater than 1 because the value of the VIX has jumped higher than the value of the VIX3M.

The VIX/VIX3M relative-strength chart has been greater than 1 since December 17, and it is still there. It has come off its intra-day high of 1.21, but its closing value of 1.15 shows that traders are still petrified the market may continue to drop.

Tracking volatility
How Is Buffett's Berkshire Hathaway Positioned for 2019?

Bottom line: Breathing room, but don't hold your breath

The S&P 500 has created a little breathing room during the past two days by bouncing back up from bear market territory, but don't hold your breath for a raging bullish comeback just yet. A bullish bounce in the middle of a bear market can just as easily turn into a bearish continuation pattern as it can a bullish recovery.

I'm seeing signs of hope, but we still have a lot of unanswered questions.

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