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VIX Simmers as S&P 500 Surges on Fed, Fiscal Stimulus Hopes

VIX Simmers as S&P 500 Surges on Fed, Fiscal Stimulus Hopes

2020-03-24 21:42:00
Rich Dvorak, Analyst
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VIX INDEX, S&P 500 PRICE OUTLOOK: VOLATILITY DROPS AS STOCKS SOAR ON FED INTERVENTION, HOPES CORONAVIRUS STIMULUS BILL WILL PASS CONGRESS

  • S&P 500 notched its largest single day gain on a percentage basis since October 2008 during the global financial crisis due to optimism surrounding expected fiscal stimulus
  • The VIX Index hangs around extreme highs as stocks skyrocket nearly 10% during Tuesday’s trading session – likely with help from the FOMC
  • Stocks remain deep in bear market territory as recession risk looms amid the coronavirus pandemic

The US stock market soared on Tuesday with the S&P 500 Index spiking almost 10% off its lowest level since November 2016. Stocks staged a remarkable recovery from their recent selloff as investors turn less pessimistic owing to an expanded Fed arsenal and hopes that US congress will soon pass the coronavirus stimulus bill to offset intensified recession risk.

US 500 BULLISH
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Change in Longs Shorts OI
Daily -3% 20% 13%
Weekly -42% 166% 36%
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S&P 500 INDEX PRICE CHART: 4-HOUR TIME FRAME (FEBRUARY 17 TO MARCH 24, 2020)

S&P 500 Index Price Chart SP500 SPX500 Stocks

Chart created by @RichDvorakFX with TradingView

While the latest rebound in stocks seems encouraging on the surface, the S&P 500 Index still trades about 27% below its record-high closing price printed just a few weeks ago. In the grand scheme of things, it is likely that the deepening coronavirus pandemic, and its mounting economic impact, have not yet peaked. If true, therein lies potential for further downside in stocks and the S&P 500 Index – even despite the unfathomable amount of liquidity being pumped into the financial system from the Fed.

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Recent economic data has already started to reveal how bad the novel coronavirus outbreak is weighing on the economy. Specifically, a record plunge in the flash IHS Markit PMI for March released this morning revealed how it is likely that the US economy is already in a recession as business activity contracts at an alarming pace.

VIX INDEX PRICE CHART OVERLAID WITH S&P 500 INDEX: DAILY TIME FRAME (NOVEMBER 2019 TO MARCH 2020)

VIX Index Price Chart Stock market Forecast

Chart created by @RichDvorakFX with TradingView

That said, the latest stock market rally could turn out to be just another dead cat bounce – particularly if congress fails to reach a bipartisan agreement on the coronavirus stimulus bill. Also, as long as the VIX Index continues to hang around crisis-high levels, high volatility is still a threat. Nevertheless, the VIX Index, or fear-gauge, trades about 20 points beneath its recent peak as stocks start to stabilize.

Read More: Gold Price to Resume Ascent as Fed Asset Purchases Balloon

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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