foxex: Why Worry

Chart Advisor | Focus on the Price

Wednesday, August 26, 2020 Headlines

1. Stock market punches higher as risk pricing remains
2. Big tech makes big gains
3. Micro cap stocks in stealth mode

Market Moves

Stock indexes moved strongly bullish today as the S&P 500 (SPX) closed up 1.02% and the Nasdaq 100 (NDX) rallied to close 2.13% higher. Small cap and micro cap stocks, closed lower today, but the big surprise was that the CBOE Volatility Index (VIX) remained in positive territory and closed above 23. This is enough to make chart watchers ponder on why everyone is so worried.

The chart below highlights the disparity between the stock and option-based index. Notice not only the difference in the final day of the chart, but also the trend over the previous three weeks. SPY appears to be making a clear trend higher while the VIX is decidedly sideways during this period of time. Notice also that option sellers have elected to hold on to their premium pricing by keeping the VIX well above the 20 mark. Late in February, the last time SPX was priced anywhere near today's range, the VIX hovered around 12.

This change implies three things: (1) there is an unusually high demand for options right now, (2) this elevated level of risk pricing is the new normal, and (3) traders are still concerned about something that might make the markets sell off hard in the next couple of months. Investors should keep a careful watch of the VIX going forward.

[NEW READER SURVEY: We are running another two-week survey of our U.S.-based readers to gauge your sentiment and see what moves, if any, you have been making with your money given the market recovery, and current economic conditions. We'll share the results, as always, and we thank you for your time and participation.]

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Big Tech Makes Big Gains

Aside from Apple (AAPL) and Microsoft (MSFT), the tech leaders put on a show today with unusually strong gains. The chart below shows that Facebook (FB), Amazon (AMZN) and Netflix (NFLX) all traded unusually higher during the session without specific news to explain why they did so. This kind of dynamic is usually a sign that some institutional investors have been holding back, hoping for better pricing, and now realized they simply aren't going to get it. When everyone piles in at the same time, prices tend to rush higher. The real question is whether the gains will hold.

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Micro Cap Stocks in Stealth Mode

As the Nasdaq and the S&P 500 push to new highs, it seems worthwhile to question whether small and micro cap stocks will participate in the gains at some point in the near future. The fact that they didn't today implies one of two things: either the VIX pricing is right, and there is danger afoot in the markets, or these stocks are comparatively under-priced and will soon move higher themselves.

As the chart below shows, the iShares Microcap index ETF (IWC) has generally kept pace with the Nasdaq 100, even if it has lagged behind for a few days on occasion. If the current circumstances are similar to those over the past three months, it would seem that investors could expect the index to catch up sometime soon.

The Bottom Line

Indexes closed strong today led by the major tech companies. The VIX shows a surprising level of resilience, holding on to significantly higher pricing than usual. With large-cap stocks on the rise, small and micro cap stocks may soon rejoin the upward trend.