Bear makes it official

  • S&P 500 down more than 26% from Feb. high close
  • SPX less than 6% from Dec. 2018 support level
  • VIX hasn’t shown signs of capitulation—yet

As the coronavirus sell-off has extended, traders have had to look at the market through a progressively wider lens, first from thinking of the down move in terms of the October–February rally, then in terms of the rally off the December 2018 lows, and now in terms of the historic bull market run off the March 2009 lows.

The following chart shows yesterday the S&P 500 (SPX) fell decisively into bear-market territory (20% or more below a previous high), and at its low of 2,478.86 the index was around 5.5% from its December 2018 low—a level many traders will be watching like hawks:

Chart 1: S&P 500 (SPX), 4/24/08–3/12/20. S&P 500 (SPX) price chart. Down more than 26% from Feb. high levels.

Source: Power E*TRADE

While any significant prior low is a potential support level, Fibonacci traders will also recognize this one as the 38.2% retracement level of the 2009–2020 bull move.

Another key piece of the puzzle for many traders will be the Cboe Volatility Index (VIX), the market fear gauge. Yesterday the VIX hit its highest level (76.83) of the coronavirus scare—a dozen points or so below its 2008 peak—as the SPX fell more than 9% to its lowest level since January 2019:

Chart 2: Cboe Volatility Index (VIX), 1/21/08–3/12/20. Cboe Volatility Index (VIX) price chart. Fear gauge at late-2008 levels.

Source: Power E*TRADE

However, the VIX level itself is less important to some traders than the pattern it sometimes exhibits at notable turning points. If the market makes a significant low, rallies, and then falls again to (or below) that low, many traders will check to see if the VIX is higher or lower than it was at the original low: If it’s higher, it suggests the market is experiencing more fear than it did at the previous low—which can mean stocks still have more downside in store. But if the VIX is lower, it can mean traders and investors are less fearful even though the market has fallen to new lows—a sign of potential selling exhaustion that's sometimes followed by an upside reversal.

One of the most dramatic examples of this occurred in March 2009 when the SPX fell below its October 2008 low, but the VIX made a much lower high than it had in October. That turned out to be the financial-crisis bottom.

It’s not a foolproof signal—there’s no such thing—but it’s one of those patterns many experienced traders will be watching as the market works its way through the coronavirus uncertainty.

Quick note on stock market circuit breakers. US stock-market circuit breakers—temporary trading halts designed to give the market a “time out” during steep sell-offs—have triggered twice so far this week. The rules halt trading when the S&P 500 (SPX) drops specific percentage amounts below the previous day’s closing price:

Circuit breaker 1: If the SPX falls 7% below the previous day’s close, trading in US equities stops for 15 minutes.

Circuit breaker 2: If the SPX falls 13% below the previous day’s closing price—before 3:25 p.m. ET—trading in US equities stops for 15 minutes. If the SPX falls 13% after 3:25 p.m. ET, trading will not stop.

Circuit breaker 3: If the S&P 500 (SPX) falls 20% below the previous day’s closing price, trading in US equities stops for the remainder of the day, regardless of when the move occurs. (In other words, after 3:25 p.m. ET, trading will not be halted unless the SPX falls 20% below the previous day’s closing price.)

So far, only the first (7%) circuit breaker has been triggered, once on Monday and once on Thursday.

Stock index futures use the same circuit-breaker thresholds, but they have an additional rule for the after-hours market: Trading is halted after any 5% move above or below the previous day’s close that occurs outside the stock market’s regular trading hours of 9:30–4 p.m. ET.

And remember: If you enter an order during a trading halt, the market may have moved significantly when it reopens—which means you may get a much different fill than you thought you would on a market order, and you may not get filled at all on a limit order.

Today’s numbers (all times ET): Import and Export Prices (8:30 a.m.), Consumer Sentiment (10 a.m.), Baker-Hughes Rig Count (1 p.m.).


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