Wall Street Week Ahead: One Volatile Day Does Not a Correction Make

NDTV Profit Desk

19 Jul 2014, 01:50 PM IST

Wall Street Week Ahead: One Volatile Day Does Not a Correction Make

Volatility spiked on Thursday after the tragedy of a downed civilian jetliner in Ukraine and the mounting death toll in Gaza and Israel interrupted the summer trading slumber.

Still, the bears may have to wait a while to call the start of a correction.

Uncertainly took over Wall Street Thursday as investors fled stocks, giving the S&P 500 its first decline of more than 1 per cent in three months. The VIX posted its biggest one-day percentage increase since April 2013, surging 32 per cent. Volume jumped 20 per cent compared to the average so far this month.

Friday's rebound, however, suggests that the market's attention to Ukraine and Gaza will be limited unless a wider conflict erupts, with investors instead keeping their focus on earnings.

"It's one thing to add to the geopolitical risk premium - that's how you get a 1 percent move," said George Pearkes, an analyst at research firm Bespoke Investment Group in Harrison, New York.

"But it's another thing to say we're going to be in a bear market because of some conflict between the United States and Russia, or the West and Russia. For that to happen, you'd have to see some trade war but we don't see that as likely."

World leaders demanded a credible investigation into how a Malaysian airliner with 298 people on board was shot down over eastern Ukraine. Meanwhile, Gaza's Palestinians hunkered down as Hamas militants urged defiance after Israel sent forces into the strip after days of cross-border fire.

Investors looking for the market to keep rising should also temper expectations. Bespoke looked at 22 past instances when the VIX jumped by 30 per cent or more and found that one week after such a move, the S&P 500 is up, on average, about 0.77 per cent.

Most of that move comes on the following day, though, when the S&P rises an average of 0.73 per cent. The previous large VIX jump, of more than 40 per cent, was in April 2013 after a bombing at the finish line of the Boston Marathon.

The weekly gains tend to be even more muted in the instances when a 30 per cent gain comes when the VIX itself is below 20 - just a 0.51 per cent rise.

That makes Friday's rebound significant - a 1 per cent rise after a 1.2 per cent drop suggests investors have almost completely shrugged off the news. To some, that's a worry about the market's current mindset.

"I guess my explanation would be the (Federal Reserve) has created a bubble," said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

"There's nothing out there right now indicating the Fed's going to change anything and that's why, when we have these dips, there's always buyers around."