Equity Volatility Gauges

As mentioned in my 2018 Market Forecast, I think that volatility will remain elevated for much of 2018 (although to what extent will, no doubt, vary) in this evolving environment where central bankers are tightening monetary stimulus measures they deployed after the 2008/09 financial crisis.

As I posted in early February, near-term major support on the SPX lies somewhere in between 2525 and 2485. The upper edge of that zone was almost hit on Friday as it reached 2532, before snapping back to close the day higher.

The following daily comparison chart shows that 10-YR rates have held near their recent highs during the recent correction of the SPX. Whether rates continue to hold or push higher on any recovery in equities, and whether that may materially impact the extent of such a recovery, remains to be seen. As long as 10-YRT remains above, firstly, 2.67% and, ultimately, 2.5%, then equities will remain vulnerable to more wild swings and weakness.

The following monthly chartgrid of 2-5-10-30-Year Bonds shows that all four of them are either at or below the –1 or –2 deviation levels of their respective long-term linear regression channels. Whether any of these begin to stabilize any time soon around these major support levels remains to be seen. The 10-YR has almost reached its 50% Fibonacci retracement level (from its lows of the 2008/09 financial crisis), so this may act as a stabilizing factor in the near-term.

As long as the SPX:VIX ratio remains, firstly, below 150, and, then, below 200, volatility will remain elevated as shown on the monthly SPX:VIX ratio chart below. Historically, price on the SPX consists of wild, aimless/trendless and very volatile swings when this ratio remains below 150.

Now that the SPX has nearly tagged its near-term support, equities may stabilize somewhat, but could be dragged down further if the FAANGs continue to decline, as shown on the following 6-month daily thumbnail charts. Keep an eye on FNGU and FNGD as a potential gauge of strength/weakness of the FAANGs +5.