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Why Volatility Index Traded Higher despite Stocks Rising

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Volatility index remained supported

The global markets trended higher in the week ended January 26, 2018, despite the confusing messages from global leaders at the World Economic Forum in Davos, Switzerland, on January 17, 2018, and messages from the central banks of Europe and Japan. Volatility surged in the forex (foreign exchange) markets as investors struggled to price in the mixed messages surrounding the strength of sovereign currencies.

For the week ahead, the FOMC (Federal Open Market Committee) meeting, US non-farm payrolls, and a series of high market-cap (capitalization) tech (technology) companies’ earnings could dominate the market’s performance.

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US market performance

The US markets remained upbeat for most of last week, buoyed by economic optimism and the short-term funding deal that reopened the US government. Economic data were below expectations, with 4Q17 GDP indicating that the US economy grew 2.6% against the market expectation of 2.9%.

The Dow Jones Industrial Average (DOD) rose 2.1% for the week ended January 26, while the S&P 500 (SPY) rose 2.2%. The tech-heavy Nasdaq (QQQ) index rose 2.3% before the key company results that are expected to be released this week.

VIX and speculator positioning

The volatility index, or the VIX (VXX), remained supported at higher levels despite the rebound and surge of the equity indexes. The only explanation that was given is that investors could be hedging their portfolios before the key results this week.

The S&P 500 VIX (VIXY) closed at 11.1, falling 1.7% for the week ended January 26, 2018. According to the latest COT (Commitment of Traders) report released by the CFTC (Commodity Futures Trading Commission) on January 26, large speculators have increased their overall short positions to 90,170 contracts from 82,244 short contracts through Tuesday, January 23, 2018.

In the remaining parts of this series, we’ll review the weekly performances and look at the outlook for various asset classes for this week.

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