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Volatility Update: First Quarter Wraps Up in Mixed Fashion

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March 31, 2016
Calm seas--at least in the second half of Q1: Volatility update as earnings season closes in

The underlying market tone, in terms of volatility, has certainly changed a lot during the first three months of this year. Although the S&P 500 finished the first quarter little changed, many measures of market volatility are probing 2016 lows. The landscape stands in stark contrast to the situation a few months ago and the generally disappointing fourth quarter earnings reporting season. The question now: can market waters stay calm through the upcoming first quarter reports?

Steady March

The second part of the first quarter was certainly different from the first half. From the New Year through February 11, the S&P 500 lost 11.5%. But from February 11 to March 22, it rebounded 12% to recover the entire loss and move into positive territory YTD. Not only that, but the average daily moves in the S&P 500 during the month of March (through the 24th) declined to roughly 10 points. That, in turn, is less than half of the average daily moves of 21 points seen in January and February.

As the S&P rebounded and trading became less turbulent, the CBOE Volatility Index (VIX) edged lower as well. On February 11, the market’s “fear gauge” hit a 2016 closing high of 28.14. A little more than a month later, VIX fell to a 2016 low of less than 14 on March 21 and remained in the mid-teens in the days that followed (see figure 1).

CBOE Volatility Index (VIX)

FIGURE 1: VOLATILITY INDEX.

VIX moved higher during the first part of the first quarter, but has been trending lower since mid-February. Data source: CBOE. Chart source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Looking below the surface of the S&P 500, it’s also interesting to note that every market sector has participated in the recent market rebound. As the table below shows, energy and basic materials have led the advance thanks to strength in commodities like crude oil and gold. Financials, industrials, and technology have also outperformed. More defensive sectors like health care and utilities are lagging, but still showing gains of more than 5%. Broad market gains also help to explain the sharp dive in VIX.

Since 2/11 YTD*
Energy 14.4% 2.2%
Materials 14.1% 1.9%
Financials 12.8% -6.9%
Consumer disc. 12.7% -1.2%
Industrials 12.7% 3.5%
Technology 12.2% 1.4%
Telecom 11.2% 2.4%
Utilities 6.8% 12.8%
Consumer staples 5.9% 3.4%
Health care 5.6% -6.9%
S&P 500 10.9% -0.8%
*through Thursday, March 24, 2016

The year-to-date performance of the broad market sectors (second column), however, tells a different tale. Namely, market action has been decidedly mixed, with some notable winners this year in sectors like industrials and consumer staples. Meanwhile, financials and health care have been weighing on the S&P 500.

Living in a Mixed-Up World

Looking forward, the focus will soon turn to earnings. S&P 500 component Alcoa (AA) unofficially kicks off the first quarter earnings season on April 11, and some of the big financials release later that week. Then the floodgate on Q1 results opens wide the following week and continues through mid-May.

Overall, results are expected to be disappointing. According to Zacks Investment Research, earnings are expected to be down nearly 10% in the first quarter compared to the year-ago period. The results are expected to remain negative through the first half of 2016.

Will corporate America lower expectations even further with disappointing guidance in the weeks ahead? Time will tell, but one possible scenario going into the second quarter is another round of the mixed earnings results, and mixed market action, that characterized the S&P 500’s performance during the first few months of the year.

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