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Is Rising Market Volatility Affecting Market Movement?

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Market volatility in January 2018

Market volatility plays a major role in market movement. Market volatility has been low in the past one year as the S&P 500 Index (SPX-INDEX), the Dow Jones Industrial Average Index (DJIA-INDEX), and the NASDAQ Composite Index (COMP-INDEX) made gradual new highs.

Market movement has an inverse relationship with market volatility. Although the CBOE Volatility Index made a record low of 8.6 on November 24, 2017, it started to recover after that. Between November 24, 2017, and February 2, 2018, the VIX Index rose 102.8%.

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On January 29 and January 30, the VIX Index rose dramatically, while the broader market S&P 500 Index fell 1.6% on these two days. On February 2, 2018, the VIX Index rose a tremendous 28.5%. However, on the same day, the S&P 500 Index, the Dow Jones Industrial Average, and the NASDAQ Composite Index fell 2.1%, 2.5%, and 2.0%, respectively. This shows that the rising market volatility is increasing market risk.

The prominent investment firm Goldman Sachs recently warned that the market might undergo some correction in the coming months, as many investors already reduced their cash positions and invested heavily in the equity market. Any weakness could lead to a large correction in market movement.

In the next part of this series, we’ll analyze how the industrial sector performed in January 2018.

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