When Volatility Reigns, Direxion Matters Even More
2018 has seen volatility in the market come back with a vengeance. The entire range of the VIX (Chicago Board Options Exchange SPX Volatility Index) for 2017 was 8.84–17.28, an incredibly low year for that measure. However, so far in 2018, we have already seen that range explode from 8.94 to 50.30 in early February. In fact, from February 5 to April 11, 2018, the VIX hit 20 or above on 33 days. Wow! Obviously, over the last two months, the market has been tailor-made for trading. Figuring out sectors’ direction has been even more important than ever. In this report, we’ll take a look at some of the most volatile sectors in the last two months and whether or not the upcoming earnings season will drain some volatility out of the market. The sectors we’ll focus on are the financials, biotechnology, technology (and semiconductors), and gold miners.
Market downturn after a stellar run in 2017
Stock markets around the world saw stellar performance in 2017. All the sectors in the S&P 500 Index enjoyed substantial growth, led by economic growth, new reforms, tax cuts, and better job numbers. The stellar performance continued this year as well. 2018 started on a positive note.
Nevertheless, things started heating up as increasing inflation fears spiked up the fear index. As of April 20, the CBOE Volatility Index (VIX) is up 20% from December 2016, as the chart above shows. With the spike in the volatility index, markets started plunging.
The jobs report in January spiked the fear further. Investors believed increasing wage growth could pressure the Federal Reserve to be aggressive about rate hikes. The Fed raised rates at its March meeting and hinted at aggressive rate hikes this year, led by economic growth.
Plus, Donald Trump’s decision to impose tariffs on up to $60 billion in imports from China stirred fear of potential trade wars. These concerns led to the market crash and a drop in performance in almost all the sectors—especially the technology sector.
Will the earnings season be a turnaround factor for the market?
It should be interesting to find out if earnings season can draw in better numbers and reduce market volatility. First-quarter 2018 earnings season has already begun. As per an April 20 Factset report, around 17% of the companies in the S&P 500 have reported earnings for 1Q18. The Factset report expects the blended earnings growth for the S&P 500 to be 18.3% for 1Q18.
The chart above shows the performance of sectors that slumped after enjoying a high for most of last year. Since February 2018, market volatility has peaked while stock market performance has plunged.
The market downfall turned around the tremendous rise that SPY enjoyed last year. After gaining as much as 19% in 2017, the S&P 500 Index is down 0.1% year-to-date. Each of the six sectors in the chart enjoyed substantial gains last year. The technology and semiconductors sectors, with respective increases of 36% and 35%, outperformed the S&P 500 in 2017. However, 2018 hasn’t turned out beneficial for these sectors yet.
In this series, we’ll take a look at the performance of financials, biotechnology, technology and semiconductors, and gold miners to date—and what lies ahead for these sectors.