This Chart Says a Selloff Is Looming as Fear Stalks the Market Rally
Wall Street’s fear index has started to move in lockstep with stock prices, and that has one money manager warning of an impending selloff even as market sentiment remains fairly stable.
Jesse Felder, founder of the Felder Report and an alumni of Bear Stearns & Co., shared a chart that showed an increasingly positive correlation between the S&P 500 and the CBOE Market Volatility Index. That reverse relationship has started to change in recent days, as expectations of a market correction mount.
The VIX is a measure of the market’s expectation for volatility over the next 30 days and is calculated from the implied volatilities of S&P 500 index options. A low reading indicates a placid market while a higher number suggests elevated uncertainty.
The options market is pricing in greater volatility ahead even though stocks don’t yet reflect this same dynamic. Over the past few years this signal has preceded anywhere from a 2% to a 10% correction.
That this trend comes on top of the 10-year Treasury yield’s nearly 40% surge over the past year, as the Federal Reserve prepares to tighten monetary policy, suggests risky assets (equities) will face significant selling pressure.
Analysts say the Fed will raise interest rates three times this year, a view reinforced by comments from Fed Chairwoman Janet Yellen that a rate hike at the next Federal Open Market Committee in mid-March is likely.
Stocks were lower for a second day in a row last Friday, but major indexes are still trading near record territory following a monster rally sparked by President Donald Trump’s pro-business agenda.