Suddenly, Volatility Comes Roaring Back

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After a long doldrums, volatility came back with vengeance last week.

Indexes swung wildly as traders scrambled to unload exchange-traded products that profited from previously calm markets. At one point the S&P 500 was down more than 9 percent, its sharpest drop since the 2008 financial crisis. But then buyers stepped in at the 200-day moving average and the loss faded to 5.2 percent.

Some veterans likened the swoon to the 1987 crash, saying too much money was concentrated in “short volatility” positions. That, in turn, triggered fast liquidations when CBOE’s VIX fear index spiked to its highest level in 2 1/2 years — a reminder that complacency can be painful when trading.

Every major sector and benchmark finished the week in the red. Energy fared worst as crude oil retreated from a multiyear high. Chinese stocks also took a beating as officials in Beijing tightened the screws on speculators. Financials and health care were near the bottom of the totem pole, as well, but retail and consumer-related names quietly held their ground.

Economic data remained solid, with the Institute for Supply Management’s service-sector report and initial jobless claims improving more than expected. While such news is usually viewed as positive, this time it reminded investors that the Federal Reserve will soon “take away the punch bowl” by allowing interest rates to rise.

Going from the macro to the micro levels, last week brought some potentially key turnaround stories. Snap (SNAP) ripped 39 percent after announcing better-than-expected results. Ditto for Twitter (TWTR), which shot to its highest level since late 2015. Both reports spurred hopes the long-term laggards will make inroads against social-media behemoth Facebook (FB). GrubHub (GRUB) surged 21 percent after inking a partnership with fast-food giant Yum Brands (YUM), and Weight Watchers (WTW) continued its Oprah-fueled comeback with a brand face-lift and teen-marketing initiative.

Cyptocurrencies also pushed higher, bucking weakness in broader equity markets.

This week has a handful of important events. The first big numbers are U.S. retail sales and inflation on Wednesday morning. The next session features initial jobless claims, the New York Fed’s Empire manufacturing index, industrial production and capacity utilization. NAHB’s housing index is also due Thursday. Friday brings housing starts, building permits and consumer sentiment. Coca-Cola (KO) and Deere (DE) report earnings as well.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.