What stock investors are watching for: signs of stability

Wall Street’s ‘fear gauge,’ investors’ sentiment and bond spreads are tracked for clues on where the market might go next.

Wall Street’s ‘fear gauge,’ investors’ sentiment and bond spreads are tracked for clues on where the market might go next. Picture: Angela Weiss/AFP

The turmoil in US stocks has nervous investors parsing the market’s internal gauges for signs of relief.

War, inflation and concerns of an economic slowdown have dragged the S&P 500 to its worst first 100 trading days of a year since 1970. With markets recovering some this past week, investors are tracking everything from options bets to surveys of investor sentiment to assess when the volatility might end.

Lindsey Bell, chief markets and money strategist at Ally Financial, said in a recent note that four of the five main indicators she tracks remain below extreme levels, suggesting that there is more room for declines. Those include:

Market volatility is below prior sell-off levels

The Cboe Volatility Index, or VIX, is known as Wall Street’s “fear gauge” because it measures the prices of S&P 500 options, including those that investors tend to use as protection for their portfolios. Though the gauge has jumped this year, it remains well below levels reached in previous bear markets.

“The VIX hasn’t spiked the way it normally would in a significant decline,” said Nancy Tengler, chief executive and chief investment officer of Laffer Tengler Investments.

Options traders’ worry is at moderate levels

Another gauge of fear in the options market has climbed, but not to extremes. The ratio of put options to call options recently touched 1.33, which is still well below highs of 1.7 reached in late 2018 and 1.8 hit in early 2020, according to FactSet. Puts confer the right to sell shares at a specific price, by a stated date, and can be used to profit from market declines. Calls confer the right to buy shares by a stated date.

Mark Hackett, chief of investment research at Nationwide Investment Management Group, said the ratio can help determine the timing of investors’ capitulation, which can mark the end of declines. When it reaches an extreme, it is a sign that “OK, today is the day everyone’s given up,” he said.

Many stocks still trade above 200-day moving average

Traders track rolling averages of stock performance over 200 days as a means of determining how the latest price swings compare with longer-term trends. When fewer stocks trade above the moving average, it shows investors growing increasingly pessimistic.

Currently, about 30 per cent of stocks are above that moving average, which is still higher than levels hit during previous times of market stress, suggesting more room for declines, according to Ally.

Bond spreads are still relatively tight

Some on Wall Street track the extra yield, or spread, that investors demand to hold corporate bonds instead of ultrasafe Treasurys, which tends to increase when they fear recession and defaults. Spreads have ticked higher recently but remain far below recent highs hit in 2020. “Spreads are widening, but they’re nowhere close to where they were in the panic mode in previous massive sell-offs,” said Dan Morgan, a senior portfolio manager at Synovus Trust Co.

Investors’ outlook: Dreary

Wall Street often tracks individual investors’ sentiment, believing that when they get most pessimistic, it is time to buy – and they have been pretty down lately.

Many use the American Association of Individual Investors’ weekly survey, which asks investors to forecast where the market is heading in the next six months. When bears surpass bulls by more than 30 percentage points, that is a sign the worst declines have passed, according to Ally.

The Wall Street Journal