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Asset Watch
Thursday, August 8, 2024
The train went off the tracks on August 5, as global financial markets suffered major derailments. The Nikkei 225 sunk by over 12%, and the overnight selling spree helped sink the NASDAQ 100 and S&P 500. The Cboe Volatility Index (VIX) also surged near 65, and the fear was palpable. But is that a good thing?
RBC Capital Markets noted on August 5 that historical bouts of volatility have rewarded the optimists. The team wrote, “The S&P 500 is a buy on a 12-month forward basis when the VIX is above 35.”
A spiking VIX often signals capitulation. So, while the S&P 500 may correct further, the index is usually higher when looking out 12 months. Therefore, traders frequently benefit from extended time horizons.
While RBC also opined that 5,100 was key, the S&P 500 bottomed near 5,120. The level is only slightly higher than the 10-month moving average (the blue line), a solid trend indicator over the last several years.
As a secondary source of support, the 15-month MA (the yellow line) has been a reliable anchor. In October 2023, a breakdown below the 10-month MA was bought near the 15-month MA. There were also instances in 2018 and 2019 where similar events occurred.
The level is even more critical because the 4,880 area is near the S&P 500’s January 2022 highs (marked by the horizontal white line). Together they create a powerful support combination that should hold if the 10-month MA falters.
For short-term traders, the outlook is less certain. Prior corrections near the 10-month MA resulted in retesting the lows later or making new lows, which may mean the August 6 optimism was more of a relief rally.
While pullbacks often brighten the long-term outlook, caution may be warranted for those trading hourly or daily charts.
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