After the rally in the stock market that began at the end of December, the carnage that gripped markets during the fourth quarter of 2018 began to fade into the market’s rearview mirror. Last week, a myriad of factors brought those dark memories back and increased the odds that the rally that took the S&P 500 more than halfway back since late December could be a bear market recovery that is now running out of steam on the upside.
The ECB told markets that growth is sluggish in the Eurozone. Friday’s employment report that told markets the economy added a lower than expected 20,000 jobs in February stoked fears that the US economy is starting to show signs of stagnation. Moreover, the action in the E-Mini S&P 500 was downright ugly last week as it put in a pattern on the weekly chart we had not seen since the start of October which was the time when stocks began to plunge.
The weekly chart highlights that the week of March 4 was the worst period of investors so far in 2019.
Meanwhile, the E-Mini traded to its highest level of the year early in the week as it put in a new peak and the proceeded to turn lower falling far below the prior week’s low and closing at just below the 2750 level. The bearish reversal is a scary pattern on the weekly chart. The last time the market put in the same chart formation was during the week of October 1, 2018, which led to three consecutive months of selling in the stock market.
Volatility may be an investor’s nightmare, but it is a paradise for nimble traders with their fingers on the pulse of markets. We could be on the verge of a return of the kind of price variance we witnessed in late 2018.
Last week, the VIX index which measures the implied volatility of put and call options on S&P 500 shares moved from the lowest level of 2019 at 13.38 on Monday, March 4 to close the week at over the 16 level once again. The VIX tends to move higher during corrective periods in the stock market because stocks typically take the stairs to the upside and the elevator lower during downside corrections. The rise in the VIX is a sign that market participants are seeking shelter in options to protect profits on portfolios. A continuation of selling this week will likely lead to higher levels of the VIX.
The stock market had a great two months following the late December 2018 low. While some may have forgotten the pain late last year, the market could provide a reminder over the coming sessions. Keep both eyes on the VIX and market action over the coming days and weeks. If the reversal in the E-Mini S&P 500 last week results in similar behavior as during the first week in October, we could be in for a very rocky period in the stock market. Fasten your seatbelts, last week’s action could be an omen for the coming weeks, and perhaps months.