A new Covid variant has spooked the markets enough to spike the VIX almost 50% (see chart here). The VIX aka the fear index took off on Friday after news out of South Africa that a new variant has emerged. The CBOE volatility index is a measure of price action in the S&P 500 options chain over the next 30 days. Investors and institutional investors alike pay attention to how investor sentiment is going at any point in time through the CBOE vol index. Historically when the markets are at work with no real headwinds or threats, the VIX in the 10-15 value range. Yesterday the VIX closed north of 27. No question over the past few days the VIX is revealing a bit of investor anxiety.
So now the question becomes is this a short-lived dynamic or is there more selling pressure in the offing? My feelings are this is a normal knee jerk reaction to yet another potential obstacle our economy and markets face. From what I have read we are weeks away to understanding the severity of this new variant or lack thereof. In the meantime, I think patience is key and to not act in haste. For all we know the vaccines could protect the population from this latest variant and if so, the markets could snap right back. However, if this becomes as severe and contagious as the Delta variant, then there is a strong chance the markets would continue to adjust accordingly.
Let’s look at the technical backdrop of the major averages starting with the Dow Jones Industrial Average (see chart here). The Dow sold off over 650 points yesterday to close just above its 200-day moving average. The S&P 500 (see chart here) closed lower by 88 points approaching its 100-day moving average. The Nasdaq Composite (see chart here) closed the month of November down 245 points while breaching its 20-day moving average. Last but not least, the small-cap Russell 2000 (see chart below) closed down sharply as well yesterday, however, technically the Russell broke its 100 and 200-day moving averages in a meaningful way which does not bode well for this particular index as we enter the last month of the year.
One final note, no matter what happens in the market here in the short term, please take care of yourselves and your loved ones. We are approaching the two-year mark of this pandemic and everyone should take this serious, put the politics and conspiracy theories away and come together once and for all.
Wishing everyone a safe and healthy holiday season 🙂