Confidence or Complacency? Fear Index Returns to Pre-Covid Levels


Stocks continued their winning streak last week as the market sees a potential return to normal following years of turmoil.

The S&P 500 rose 1 percent in the Thanksgiving-shortened period between Friday, November 17, and Friday, November 24. It was the fourth consecutive positive week.

Perhaps more importantly, Cboe’s Volatility Index (VIX) fell to 12.46. It was the lowest reading since January 2020, shortly before the coronavirus pandemic triggered one of most dramatic selloffs in history.

Stocks recovered from that crisis as the Federal Reserve unleashed massive stimulus. Still, in a sign of lingering fear, VIX mostly remained above 18. The anxieties were confirmed in 2022 as inflation surged and markets crashed. Conditions have slowly improved this year, and got significantly better as November began.

And now the VIX is back where it started. After almost four years of shocks, are things are finally returning to normal?

Cboe Volatility Index (VIX), weekly chart, showing changes since 2019.

Autos and Inflation

Consider the case of autos. The pandemic halted production and drove costs higher in 2021. But last month’s inflation report showed the biggest drop in new-car prices since August 2020. Kelley Blue Book separately noted that inventories of unsold vehicles are swelling amid weak demand. Dealers may need to respond with discounting into yearend, the report added.

Energy prices also remained under pressure. That was another area that jumped post-Covid.

Biggest Gainers in the S&P 500 Last Week
Agilent Technologies (A)+12%
Insulet (PODD)+8%
Enphase Energy (ENPH)+7.9%
Paramount Global (PARA)+7.7%
DexCom (DXCM)+7.6%
Source: TradeStation data

S&P Global said that private-sector employers cut workforces for the first time since June 2020 because of “subdued demand conditions and dwindling backlogs.” That’s noteworthy because it’s an early reading on the month of November. (Similar numbers from the Institute for Supply Management and Labor Department come 1-2 weeks later.)

S&P added that prices rose at the slowest pace in almost three years, while “manufacturing firms noted greater efficiency.” Those points could also suggest that inflation is coming under control.

Market Rotation?

Last week saw money shifting toward parts of the market that have mostly lagged. Health care led the bounce, supported by companies like Agilent Technologies (A), Insulet (PODD) and DexCom (DXCM). Better-than-expected results lifted A. PODD an DXCM continued to rebound from long-term lows. (They had fallen sharply on concerns that weight-loss drugs would reduce demand for their diabetes treatments.)

Other outperformers included transportation, materials and global stocks. Gold miners jumped as continued weakness in the U.S. dollar increased the appeal of precious metals. Gold futures (@GC) also had their highest weekly close since July.

The price action may suggest investors are starting to rotate away from megacap growth stocks, which have dominated performance this year. Traders may watch for signs of the trend continuing because lower volatility sometimes helps smaller stocks.

Two megacap growth stocks had important news last week. Nvidia (NVDA) reported strong quarterly results thanks to Artificial Intelligence (AI) demand. But the semiconductor giant fell after Reuters reported it will delay sales of advanced AI products to China. Microsoft (MSFT) also flirted with new highs after successfully navigating a boardroom fight at key partner OpenAI. (AMZN) could be the next big name, with AI news expected at its re:Invent cloud-computing conference this week.

S&P 500, daily chart, with key levels and indicators.

Charting the Market

The S&P 500 ended last week at its highest level since mid-summer. The index is entering a bearish price gap from August 2 and is just 1 percent from its 52-week high.

Wilder’s Relative Strength Index (RSI) hit “overbought” territory. That could make some chart watchers expect a pause or pullback.

Still, the sharp drop in volatility and recent improvement in sentiment may limit selling pressure.

The Week Ahead

This week brings a few important company events and a little bit of economic news.

Biggest Decliners in the S&P 500 Last Week
Jacobs Solutions (J)-8.8%
Autodesk (ADSK)-6.4%
Zions Bancorp (ZION)-4.8%
NRG Energy (NRG)-4.6%
Norwegian Cruise Line (NCLH)-3.8%
Source: TradeStation data

AMZN’s cloud-computing conference starts today. Traders will likely watch for news about AI features or growth estimates.

New home sales are also due and CrowdStrike (CRWD) reports earnings.

Revised gross-domestic product follows on Wednesday, along with results from Snowflake (SNOW) and Dollar Tree (DLTR).

Thursday brings the personal consumption expenditure (PCE) price index, an important inflation report. Initial jobless claims are also due. (CRM) reports earnings.

Friday is the first day of December. It features ISM’s manufacturing report and construction spending.

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