Volatility Under Siege as Fear Evaporates

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VIXSuddenly volatility is getting sucked out of the market.

Cboe’s much-vaunted “fear index” — the VIX — is down to 13.41 percent. That’s the lowest close since January 26, shortly before a gut-wrenching selloff triggered the volatility index’s quickest spike this century.

Investors have stomached a lot anxieties since then. First came a nearly constant drumbeat of trade wars with China and presidential attacks on e-commerce giant Amazon.com (AMZN). That was followed by uneasiness about rising interest rates and Iran.

VIX ($VIX.X) chart

Earnings season is also winding down. It wasn’t perfect, by any stretch of the imagination. Industrials, in particular, had a lot of rough surprises. But big Tech kept the train on the track, especially Apple (AAPL). A much-feared iPhone slowdown didn’t pan out, and CEO Tim Cook promised to fork over $100 billion to investors. Then Warren Buffett came along and drove the tech giant to a new high with news of building a stake in the world’s most valuable company. Facebook (FB) wasn’t too shabby either.

Bulls have also found a new champion in energy stocks as crude oil flies to its highest level in almost three years. Some companies in the sector, especially Marathon Oil (MRO) and Devon Energy (DVN), also showed big improvements in their operations.

But there’s more, because despite rising oil prices, inflation remains under control. Today’s producer price index missed estimates. So did last month’s consumer prices. And over in Europe, central bankers had to cut their inflation forecast in late April. In other words, the “Goldilocks” scenario continues: Not too hot, not too cold.

Investors interpret that as meaning Federal Reserve can keep raising interest rates at a steady pace… potentially good news for the banks — another major group that could be breaking out. There’s no need for policymakers to panic, and even potentially room to bring back the “punch bowl” in case the party starts dying down: That’s the thinking. Maybe Jerome Powell’s not such a bad guy after all.

There’s also been a steady diet of mergers and initial public offerings. Just to name a few on the merger front, you have a bidding war for Fox, Japan’s Takeda buying Shire Pharma of the U.K. and Marathon Petroleum (MPC) gobbling up Andeavor (ANDV). IPOs also had their busiest month in at least a decade. Both trends reflect confidence about the future.

Finally, the S&P 500 and Dow Jones Industrial Average both managed to close back above their 50-day moving averages yesterday after cowering below those levels on Monday. This line has been the big obstacle for bulls since February. Is it finally ready to break?

Bottom line: There are signs of sentiment turning as February’s crash increasingly fades into the rearview mirror.

S&P 500 Index ($SPX.X) with 50- and 200-day moving averages.
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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.