foxex: Drop the Vol

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, March 20, 2020

1. Bonds recover as both stocks and volatility drop

2. Keep an eye on these numbers

3. Investing in food-delivery companies

Market Moves

Bond prices lifted as the Fed ran through its specialty tool chest to lower market yields. This should bring delight to those who have already moved out of stocks and into bond funds in their retirement accounts. Meanwhile something interesting happened as stocks closed on new lows: volatility decreased. That's good news for those hoping to see the markets bottom and reverse course as soon as possible.

Though the CBOE Volatility Index (VIX) remains high, as the following chart shows it tracked below 60 today. More importantly, it did not close at a new high. As those who trade VIX ETFs know, the VIX generally mirrors the inverse action of the S&P 500 index (SPX), so for the latter to make a new low, the former should be making a new high. The fact that the volatility index is nowhere near its high is a major signal markets may soon be ready to calm down.

Buyers should beware about running out to load up on stocks like young moms around a fresh shipment of diapers arriving at Costco. Looking back at history, stocks will still go lower even as volatility drops, but, the rate of decrease will slow until the turnaround comes.

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Keep an Eye on These Numbers

If the markets are going to rebound anytime soon, the first indication of hope for a sustained rally will likely be found in the news that new COVID-19 infections appear to have peaked and are on the decline. The chart below forecasts what that might look like. (Please note these projections are hypothetical and not based on any scientific modeling.)

This chart gives an example of the kind of appearance that analysts will be looking for in the data. Asian countries that have successfully contained the outbreak (South Korea, Japan, Taiwan, and even Hong Kong) have already run the course of new infections peaking and declining. The period of time took about 30 days for them. Can Europe and the United States follow suit? If so, relieved investors will be hungry to ride the indexes back up to former highs.

However if, as some fear, the results from social distancing seems to drag on and take longer than this for new infection numbers to peak and decline, the market direction may persist in a downward trend. Mark your calendars and watch the VIX!

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Investing in Food-Delivery Companies

While riding out the pandemic at home, working or otherwise, you may get hungry for delivery. If you can accept the word of many vendors and food delivery companies that they are coronavirus free, then you might try ordering. Some investors appear to be betting that you'll get Domino's (DPZ) pizza delivered. The shares have actually held on to be up 10% so far this year. Papa John's (PZZA) recently bounced strongly from its lows, though Seamless and Grubhub (GRUB) haven't convinced investors to give them a try, yet.

The Bottom Line

Stock indexes closed near their lows slicing off another four percent or more, while bond prices rallied. The VIX dropped lower than it closed and lower than it opened today. This subtle divergence means market makers don't feel the need to price in quite as much risk, and may see investors getting ready to start buying in the weeks ahead. However, the pandemic still has to run its course. Consider some pizza, or pizza company stocks, until then.