foxex: Bear Market

Chart Advisor | Focus on the Price

Wednesday, March 11, 2020

1. Volatility pricing at foreboding levels

2. Some target funds look ugly right now

3. A remote portfolio

Market Moves

Stocks fell to their lowest close of the year so far and fell by a larger amount than any other day this year (besides Monday). Today's roughly five percent drop has only been bested a handful of times in the last decade on any of the major market indexes. State Street's S&P 500 index ETF (SPY), and Invesco's Nasdaq-100 ETF (QQQ) have both hit this mark no more than five times. Perhaps that's why stocks staged a sucker's rally yesterday, since each previous time it did so was near a short-term swing low. However, this time it might be different.

That's because almost none of the previous occurrences coincided with the kind of pricing shown today in the options of the CBOE's Volatility Index (VIX). The chart below gives a visual representation of the pricing of options on the VIX. Based on the pricing, these ranges represent just over a one-standard-deviation range of probability for each given expiry. What stands out is that the pricing of all of these ranges puts them above 30 for the next six months. Option market makers are basically saying they think that the market is going to remain crazy and generally trend lower for the foreseeable future. The fact that the Dow Jones Industrial Index (DJX) slipped into bear market territory only confirmed what they fear.

There is one other possibility, and that is that these prices are simply overdone, the market correction is over, and all will soon return to normal. Seems like a slim chance. More specifically a fifteen percent chance of avoiding a bear market. At least that's the way options were priced today at the close.

Some Target Funds Look Ugly Right Now

If you hate the idea of having to watch charts and look at stocks, you're probably not reading this right now. That simply says you aren't like most people. Most people would rather set their retirement choices up once and walk away and forget them. That's why target funds were invented. You pick a fund that matches your planned-for retirement year (or thereabouts) and simply put all your eggs in that basket. The fund will diversify for you and change that diversification over time.

The chart below shows how a comparison of two such funds (from Vanguard) and compares them with a couple bond-heavy funds. Younger individuals using such a fund and targeting retirement in 2050 probably won't want to look at their portfolio today. It has likely dropped about 15 percent in value over the past two weeks. Retirement hopefuls targeting five years out have had to endure significantly less volatility, but even these kinds of funds have dropped about ten percent recently. By comparison, funds that are 80 percent or even 100 percent composed of bonds are up for the year. That likely sounds attractive, but if you think about the way the bond prices collapsed over the past three days, such funds may have more volatility than desired in the days ahead.

That's why looking at these funds over the course of a full year can help. It's true the drop lately has been precipitous, but over the past year, the 2050 fund has only lost 3.9% and the 2025 fund is nearly unchanged. These amounts can easily be compensated for in any subsequent upward trend of the stock market.

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A Remote Portfolio

The chart below shows that professional networking need not include a physical handshake in the days ahead. Three companies are thriving under the Coronavirus outbreak: Citrix Systems (CTXS), the Meet group (MEET), and Zoom Communications (ZM). This chart shows what an equal-weighted portfolio of all three stocks would look like. Generally speaking, their stocks are trending higher despite the rampant uncertainty, driven my increasing requirements to work from home in the workplace.

The Bottom Line

Another big sell-off of stocks leaves investors and traders alike both concerned. Option and volatility pricing are at peculiar high points, and it seems that the pricing reflects the expectation of a bear market ahead. Software for virtual meetings and online communications has come in vogue among investors.