Market Commentary
Pullback Over, or More to Go?
We don’t know of course. But a handy hack is looking at volatility for an indication of a market bottom.
The VIX index closed at 16.39 on Friday, July 26, 2024. The long run mean is from 1990 through now is 19.5. The most recent VIX peaks in the past year were 21.7 on October 27, 2023, and 19.2 on April 15, 2024.
The associated SPX pullbacks were -10.3% and -5.3%, respectively, and the market bottoming process occurred 4-7 calendar days after the VIX peak. On Thursday, July 25th, The VIX hit an intraday high of 19.36 and closed at 18.46.
Now the above should be contextualized with seasonal patterns in volatility. Volatility is not evenly distributed throughout the calendar year. The distribution also isn’t random.
Three months tend to mark VIX peaks – January (6 times), August (5 times), and October (5 times) since 1990. December tends to mark troughs (9 times).
The relevant observation here is that the first half of the year tends to mark the quietest parts of the year, and the second half becomes more volatile. An added caveat is that in presidential election years, the VIX is more likely to top out in the first half of the fourth quarter as the election gets settled. In the eight presidential elections since 1990, the VIX has topped out in the first half of Q4 five times.
The bottom line is that the VIX is most likely to top out in November of this year than this summer.
This is not to say that traders should hide out in cash until then. U.S. equities have generated positive gains in 82% of years since 1979 (36 out of 44 years) and have peaked 70% of the time in Q4 in the same time frame.
Given Pinebrook’s view that the economic cycle is solidly in expansion territory, and that the Fed Put is live, whipsaws and pullbacks should represent a BTFD opportunity going into H2, despite the historical potential for increased volatility though October and the noise from the U.S presidential election.
Looking beyond VIX voodoo, and contextualizing tech pullbacks in this current cycle, we can see that this current pullback is not only run of the mill, but also on the shorter end.