As the week crawls to an end, the week that was saw the first bout of equity volatility in a while. As I write this the VIX is up about 17% from last Thursday’s close, off of a level that matched 7 year lows. While a 17% move sounds a bit dramatic it is important to note that spot VIX just above 12, sits nearly 17% below the average of 2014 of about 14 and 40% below the long term average of 20.
Assessing the damage in the US… it was basically in line with what we have seen for the better part of 2014, large cap out-performance, with the SPX down a shade less than 1%, Nasdaq 100 down about 50 bps, and the Russell 2000 down about 3.75%. Investors are quick to shoot first and ask questions later when it comes to mid to small cap stocks with high valuations.
Aside from the Russell 2000, the most dramatic selling was in Europe, with the Euro Stoxx 50 index down about 3.5%. As we noted on Wednesday, referring to the weakness in European Bank Stocks (MorningWord 07/09/14: Euro Bank Weakness Notable) the price action is concerning as it has been general consensus among pundits that aside from Fed induced volatility, the most likely culprit for a little movement in U.S. equities would be some sort of external factor. The 1 year chart of the Euro Stoxx 50 Index shows the roughly 5% decline from the 6 year highs made on June 20th, making its depth the 3 largest peak to trough decline this year:
For comparison sake, the SPX has had two real sell offs in 2014, with the January/February sell off registering 6% from peak to trough, and the early April sell off equaling about 4.25%. And the rest is history. Since the low on April 15th, the SPX is up 8% and has not suffered at close of more than 1% since. The SPX remains an anomaly, almost like a safe haven asset.
On the flip side though, much like the Russell, European equities could be the go to short on rallies for those who think we eventually get a 10% correction ( I think the current time between now and the last one is the longest stretch since the mid 1990s) This is to pick on weakness rather than to try to pick a top in strength. One way to do so in the Euro Stoxx 50 would be through the FEZ, the etf that tracks the index. Looking at the one year chart below, it is apparent that the stock made an important break of the uptrend that has been in place for more than a year. Interestingly, the etf stopped on a dime right where it should of this morning, on its 200 day moving average (yellow line) and closed at the prior breakout level from late last year that has served as decent technical support. Make no mistake, the index/etf is sitting on important support, and a break below could see a re-test of the 2014 lows near $39.
IWM has been a tough signal to read domestically as some of the high flying stocks have been all over the place as the SPX has shown little volatility in sympathy. But perhaps it’s time to start paying more attention to Europe as far as what to watch for the next moves in our own broader market.