Then, very quietly on Friday, February 2nd, the market began to decline, recovering slightly before gradually and relentlessly declining until the market closed. What was unusual was that roughly 90% of stocks fell, with 90% of the selling volume going into these declining stocks- a rare occurrence with falling demand and rising selling pressure.
Monday, February 5th, opened down slightly and remaining roughly flat before beginning its own relentless decline at midday, a decline that accelerated into market close, with the S&P 500 falling a sharp -4% on the day. Simultaneously, the VIX jumped a whopping 115%. The market, as discussed before, had become quite complacent with many traders ill-prepared for the sharp rise in volatility.
Let's pause a moment there. Volatility blowing up triggered some margin calls and roiled ETNs that attempted to track the VIX's movement. One result of such a violent VIX move was that the small Credit Suisse ETN VelocityShares Daily Inverse VIX (ticker XIV) blew up, falling -80% on the day and becoming totally worthless by the next. Vehicles that attempted to track the VIX also had to make outsized futures' purchases to play catch up.
What happened with the "50 cent" trader's massive (and up until that point, down $200 MILLION) bet for a higher VIX? Read about that here: https://www.bloomberg.com/news/articles/2018-02-12/-50-cent-vix-trade-just-paid-off-to-the-tune-of-200-million-----
From Friday's decline and the week of February 5th, the S&P 500 plunged a total of about -8%. Then, this last week of February 12th, the S&P 500 reversed and climbed a total of +4.3%. But the big question is where do we go from here?
While nothing in the world of equity market can be certain (except that, all else equal, a long-term buy-and-hold strategy of the market will always win), understanding the cause of the market decline would help investors decide if they want to trim, maintain, or increase their equity holdings.
More aggressive interest rate hikes (we have a new Fed Chair!) and the spectre of inflation (after all, Friday February 2nd's decline didn't occur until evidence of wage pressures occurred in economic data) have been noted as potential - and inter-related - catalysts. Volatility has been really way to low and the market way to complacent recently as well. And then of course, Treasury yields (10-year, but why not the 5-year? See article below) has been rising rapidly and relentlessly too. And Technicals had also been indicating the market was moving ahead of itself, so perhaps this was only a technical correction.
Treasuries and how they can help us interpret how equity markets might behave (a great article): https://www.barrons.com/articles/bonds-behaving-well-a-tale-of-two-markets-1518234370We can be certain of one thing: the market is behaving more like it has behaved historically, which indicates that volatility may now be here to stay. If that's the case, perhaps quality is now a trait that investors would do well to pay attention to!
