Stocks Experiencing Unusual Volatility After Earnings, What Does It Mean?
The stock market has been experiencing an unusually high level of volatility following earnings reports, leaving investors questioning the reason behind this sudden trend. Despite the S&P 500 index closing at a record high above 5,000, volatility, as measured by the CBOE Volatility Index (VIX), has been on the rise rather than declining. This increase in volatility has coincided with the upward move of the S&P 500, leading Wall Street to become more skeptical. Even when companies report positive news, unexpected elements leave investors on edge. Matt Amberson, Principal at Option Research & Technology Services, states that “we’re climbing a wall of worry. There’s more worry than there should be given what the market is doing.”
The situation is reminiscent of last summer when the VIX rose alongside the S&P 500 before a market pullback occurred in the fall. This correlation has sparked concerns regarding the outlook for the stock market this spring.
Despite the market’s overall positive trend, the larger-than-usual stock movements have not been limited to low-liquidity shares or companies with smaller market capitalizations. Even technology behemoths with trillion-dollar market caps have experienced significant stock moves. Michael Urbik, President of financial management firm Hinsdale Associates Inc., finds this phenomenon quite extraordinary, emphasizing that anyone claiming otherwise must be new to the industry.
Interestingly, the options market, often referred to as the “Las Vegas odds makers for Wall Street,” has underestimated post-earnings stock moves. A strategy called a straddle option indicates the difference between predictions of stock movement by the options market and the actual result. Historically, the options market has priced straddles with parameters wide enough for investors to lose money. However, recently the market has priced straddles resulting in actual stock moves higher than predicted, with each week since the start of earnings season in January surpassing the predicted rate.
Amidst this, investors continue to worry about the future outlook, uncertain about the state of the economy and interest rates. The question remains, what does this mean for the stock market? Past trends have shown that when the S&P 500 and VIX both trend higher simultaneously, a short-term pullback follows. This occurred last summer with a three-month decline of 8.6% in the S&P 500. Market technician Craig Johnson suggests that the current climb to new highs in the S&P 500 hasn’t seen a corresponding increase in the number of stocks reaching fresh highs. This lack of breadth in the market could indicate that a “meaningful” pullback, similar to the one seen last fall, may be on the horizon. However, Johnson clarifies, “we are not bearish on the stock market.” He anticipates a healthy correction in the range of 5% to 10%.
In conclusion, the recent rise in stock market volatility after earnings reports has left investors questioning the reason behind this trend. Uncertainty surrounding the future outlook, combined with skepticism from Wall Street, has contributed to this increased volatility. As the stock market continues to climb to new highs, the lack of breadth in the market suggests that a correction may be on the horizon. However, experts are careful to clarify that they are not bearish on the stock market and predict a healthy correction rather than a major downturn.
Analyst comment
Neutral news.
As an analyst, the recent rise in stock market volatility after earnings reports suggests increased uncertainty and skepticism. The lack of breadth in the market indicates a possible correction, but experts anticipate a healthy correction of 5% to 10%, rather than a major downturn.
