Stocks Break to New Highs While VIX Drops to New Low
I have to sit back and smile every now and then when I think about the great names folks in the financial industry come up with for things. Today is one of those days that is making me smile because today is "quadruple witching" day.
Quadruple witching day may sound mysterious and ominous, but it is really quite mundane for most individual investors. A quadruple witching day is a day on which four asset types – stock index futures, stock index options, stock options and single stock futures – expire simultaneously. This phenomenon happens four times per year on the third Friday in March, June, September and December.
As an individual investor, you may be in a trade that could be affected by one of these expiration dates – most likely a stock option trade – but you are most likely not going to be affected in any significant way by the quadruple witching. Portfolio and fund managers, on the other hand, have to pay much more attention to quadruple witching day because they will likely have multiple positions that will need to be addressed to ensure that their portfolios and funds continue to operate smoothly. This portfolio and fund rebalancing typically leads to a huge volume spike on quadruple witching day as managers liquidate old positions and enter new ones.
In the past, the volume spike has been coupled with a volatility spike. But the more technologically sophisticated and connected managers and financial exchanges have become, the easier it has become to plan for and execute large, non-disruptive trades right before the closing bell on quadruple witching day – which is when most of the big trades clear, as you can see on the five-minute chart of the S&P 500 below.
At the end of the day, quadruple witching day is certainly notable because of all that is happening in the financial markets, but it shouldn't be a day you fear. It won't affect the fundamentals of the trades you are in or the portfolio you have constructed.
We've been waiting and watching for a month to see if the S&P 500 was ever going to garner enough strength to break up through resistance at 2,816.64 – the high established on Oct. 17, 2018 – and the day has finally arrived. The S&P 500 closed at 2,822.48 today, after having climbed to a new intra-day high for 2019 at 2,830.73.
This move is by no means a guarantee that the index is going to go on to challenge its Sept. 21, 2018, high of 2,940.91, but it certainly clears the way for investors to try and push the S&P 500 higher. At a minimum, it puts the next resistance level of 2,872.87 – the high the index reached on Jan. 26, 2018, which then served as support while the S&P 500 consolidated from late August through early October of the same year – well within reach.
Plus, because the S&P 500 dropped so quickly through the range between 2,872.87 and 2,816.94 when it broke lower on Oct. 10, 2018, the chart didn't get the chance to develop any support levels on the way down that could now turn around and serve as potential resistance levels on the way back up.
Nightmare on Wall Street: The Spooky Terminology of Investing
How Do S&P 500 Futures Work?
What Is the Average Annual Return for the S&P 500?
Risk Indicators – Volatility Index (VIX)
Quadruple witching day is the perfect day to highlight the difference between volatility and implied volatility. Volatility is a measure of the breadth of movement the market, an index or an individual asset, like a stock or an exchange-traded fund (ETF), is currently experiencing. For instance, if a stock or an index is quickly bouncing back and forth in a wide range, its volatility is high. Conversely, if a stock or an index is slowly bouncing back and forth in a tight range, its volatility is low.
Implied volatility, on the other hand, is a measure of the expected volatility the market, an index or an individual asset is going to experience in the future. For instance, if investors believe a stock or an index is going to make a large move in the future, its implied volatility is high. Conversely, if investors believe a stock or an index is not going to make a large move in the future, its implied volatility is low.
The CBOE Volatility Index (VIX) is an implied volatility index. It measures how concerned investors are that the S&P 500 is going to make a large move – typically to the downside – in the future. When the VIX climbs to higher levels, like it did in late December 2018, it indicates investors are concerned the S&P 500 may move significantly lower in the future. When the VIX drops to lower levels, it indicates investors are comfortable in the stability of the S&P 500 and aren't preparing for a dramatic drop.
That's why today was so exciting for the bulls on Wall Street. For the first time since Oct. 4, 2018, the VIX dropped and closed below 13. The last time the VIX was down at these levels – from May through September 2018 – the S&P 500 enjoyed a steady climb to new all-time highs.
How to Use a VIX ETF in Your Portfolio
The VIX: Using the 'Uncertainty Index' for Profit and Hedging
Strategies to Trade Volatility Effectively With VIX
Bottom Line: Reading the Tea Leaves
Just seeing the VIX drop back down below 13 is not a guarantee that stocks are going to continue to rise. It puts the odds in our favor that investors are optimistic, but it should never be construed as a guarantee. However, when coupled with the resistance break the S&P 500 made today, it is an incredibly encouraging sign.
10 Years Later, Lessons From the Financial Crisis
5 Large-Cap Stocks for Bull or Bear Markets
Learn the Basics of Investing
Enjoy this article? Get more by signing up for the Chart Advisor newsletter.
Source: Read Full Article