A key benchmark for global market volatility has spiked to its highest levels since the November elections in a move that could awake investors from a bull market slumber that has relentless lifted stocks around the world to all-time highs this year.
The CBOE Volatility Index, commonly known as the VIX or, even more colloquially, the 'Fear Index', spiked 44% to its highest level since Nov. 8 Thursday in New York and extended its rise to 16.17 points during the Asia trading session Friday as investors reacted to the escalating military rhetoric between North Korea and the United States.
The benchmark eased by some 4% in Friday's U.S. session, however, after softer-than-expected July inflation data gave stocks a surprise lift as investors trimmed bets on faster interest rate hikes from the Federal Reserve and steered cash back into beaten-down equities.
Thursday's trading, however, saw options volume rise to record of nearly 2.6 million contracts, according to CBOE figures, as the S&P 500 notched its biggest single-day decline since May 17.
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The change in investor tone followed not only the escalation on tensions between the U.S. and North Korea, with President Donald Trump warnings that his "fire and fury" threat might not be "tough enough" to dissuade Pyongyang from "disrespecting our country", but also a string of all-time highs for U.S. and global equities.
The Dow Jones Industrial Average has notched 35 record closes so far this year, the last on Aug. 9, the highest total for the 8 month period since 1997. The S&P 500, a broader measure of U.S. share prices, has had 30 record highs so far this year, the most since 2014, while the Nasdaq has put together 44 all-time closing highs, the most since the tech stock bull market in 1999.
However, not everyone was caught off guard by the market's persistent advances. Earlier this week, TheStreet's technical analysis expert, Bruce Kamich, cautioned that the VIX could "spike to around 16" and that could mean "a more significant decline in stock prices. Keep your seat belts low and tight around your waist."
"The VIX has been trending lower for months, with brief and short-lived up-thrusts. In the daily chart, below, we can see the down trend and negative slope for the 200-day moving average line," Kamich noted.
"Notice the higher lows from the 12-day momentum study? The lows from May to June to July have been higher and higher even as the VIX has gone lower and lower," he said. "This difference is called a bullish divergence by technical analysts. The pace of the decline since May has slowed. In the lower panel the trend-following Moving Average Convergence Divergence (MACD) oscillator also has made higher lows and is crossing above the zero line for an outright go-long signal."
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