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Stocks Soar as Volatility Flops; Is it a Bear Market Bounce?

Stocks Soar as Volatility Flops; Is it a Bear Market Bounce?

2020-03-25 21:03:00
Rich Dvorak, Analyst
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STOCK MARKET FORECAST: STOCKS SKYROCKET & VOLATILITY WILTS ON FED LIQUIDITY, CORONAVIRUS STIMULUS OPTIMISM – IS THE SELLOFF OVER?

  • S&P 500 Index, Dow Jones and Nasdaq surge on Wednesday as the US stock market benchmarks rebound for the second consecutive trading session
  • FOMC asset purchases and the Fed liquidity backstop, combined with hopes for a $2 trillion coronavirus stimulus package, likely fuels the recovery in stocks
  • The VIX and other cross-asset volatility benchmarks are starting to slide after spiking to levels not seen since the global financial crisis

Stocks continued their recovery attempt on Wednesday in an extension of gains recorded during the previous session. As equities start to stage a rebound from their recent plunge, which came in response to the coronavirus pandemic and heightened recession risk, the S&P 500 Index, Dow Jones and Nasdaq are now up 14%, 18% and 10% respectively since Monday’s close.

US 500 MIXED
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Weekly -5% 1% -1%
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S&P 500 INDEX, DOW JONES, NASDAQ PRICE CHART: DAILY TIME FRAME (YEAR-TO-DATE)

S&P 500 Index Price Chart Dow Jones Nasdaq

Chart created by @RichDvorakFX with TradingView

Despite massive gains notched by stocks over the last two days – primarily driven by news of unlimited QE from the Fed and prospect of a $2 trillion fiscal stimulus package from US Congress – the three major stock market indices remain more than 20% below their all-time record highs printed just a few weeks ago. This raises the question whether the recent stock market selloff is behind us or if the latest surge in stocks is just another bear market rally.

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VIX ‘FEAR-GAUGE’ & OTHER CROSS-ASSET VOLATILITY MEASURES ELEVATED BUT DOWN FROM EXTREME HIGHS

VIX Index Price Chart Volatility Falls Stocks Soar on Fed and Fiscal Stimulus Despite Coronavirus Recession Risk

Chart created by @RichDvorakFX with TradingView

Perhaps one encouraging development for the S&P 500, Dow Jones, Nasdaq and other risk-assets is the retracement lower in volatility. Although the VIX Index, or ‘fear-gauge,’ and various other cross-asset volatility benchmarks have pulled back from their recent swing highs, they all remain extremely elevated, and likely signal caution and prudent risk management trading techniques are still warranted.

Learn More – S&P 500, Dow and Nasdaq: Key Facts, Differences and Opportunities

On that note, a great deal of uncertainty still remains around how deep and prolonged the coronavirus-induced recession will be with a significant portion of the world on lockdown and business activity at a standstill. Moreover, fiscal stimulus hopes may prove premature considering US politicians are still struggling to agree on legislation.

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That said, there is a strong possibility that stocks might resume their broader downtrend while safe-haven assets, such as the US Dollar or gold, come back into demand. Investors might look to coronavirus stimulus bill headlines for clues on where the stock market heads next.

Also, high-impact weekly US jobless claims data, which is due for release Thursday, March 26 at 12:30 GMT according to the economic calendar, could have a serious impact on stocks and trader sentiment. A record-setting spike in US jobless claims has potential to send the S&P 500, Dow Jones and Nasdaq spiraling lower.

Keep Reading – 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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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