S&P 500 Bulls Need to Be Patient as Struggling Volatility Index Offers Hope

 | Nov 10, 2023 12:48AM ET

  • Aggregate S&P 500 earnings are on track to rise for the first time in a year. Retailers are on tap next week.
  • Previous 8-day declining streaks in the VIX have been bullish for the S&P 500.
  • But with prices testing resistance in the 4400-4415 area, patience is warranted for bulls.

    • Fundamentally speaking, the S&P 500 is having a solid year. Major corporations were able to protect their profit margins by “passing through” increasing costs from rising inflation, allowing earnings growth to get back on track after a mini “earnings recession” in the early part of the year. Indeed, according to the earnings mavens at Factset, the index is on track to see aggregate Q3 earnings rise 3.7% y/y, the first year-over-year gain since Q3 2022.

    Looking ahead, next week brings major earnings reports from retailers like Home Depot (NYSE:HD) (Tuesday), TJX (NYSE:TJX) (Wednesday), Target (NYSE:TGT) (Wednesday), and Walmart (NYSE:WMT) (Thursday), as well second-tier tech firms like Palo Alto Networks (NASDAQ:PANW) (Tuesday), Cisco Systems (NASDAQ:CSCO) (Wednesday), and Applied Materials (NASDAQ:AMAT) (Thursday). In particular, the retailers should provide insight into the health of US consumers, which so far, have shown no sign of reigning in their spending yet.

    h2 S&P 500 Technical Analysis: Previous 8-Day VIX Decline Streaks/h2

    One interesting move that some traders have identified is the eight consecutive day decline in the VIX, or Wall Street’s “fear gauge.” The index measures the implied volatility of options on the S&P 500 and generally moves inversely to the stock market index itself.

    Streaks of eight consecutive days of declines are relatively rare historically, occurring just 13 times since 1990, or roughly once every 2.5 years. Interestingly, these streaks have historically led to above-average returns in the S&P 500, though of course past performance isn’t necessarily indicative of future returns. Following the previous 8-day losing streaks in the VIX, the S&P 500 (price only) has seen the following average returns:

    • 0.4% over the following 1 week (vs. 0.2% in all periods since 1990)
    • 2.4% over the following 1 month (vs. 0.7% in all periods since 1990)
    • 3.7% over the following 3 months (vs. 2.2% in all periods since 1990)
    • 7.6% over the following 6 months (vs. 4.5% in all periods since 1990)
    • 14.4% over the following 12 months (vs. 9.3% in all periods since 1990)

    Overall, the broad US index has traded higher one year later 100% of the time since 1990 after an 8-day losing streak in the VIX.