Market Musings 05/03/22: Key Market Indicators to Watch

6th Mar '22 by Edmund Shing

8 comments 1757 reads

Market Musings 05/03/22:
Key Market Indicators to Watch

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Weekly Summary:

Stock markets continue to decline, with hints of a selling climax in Europe
Sectors suffering most: Banks, Autos, Travel & Leisure
Four key market risk indicators to monitor for signs of further deterioration or improvement in the environment for risk, and thus for stock markets -
A. Oil and natural gas prices, as sustained super-high energy prices can provoke global economic recession
B. US bond yield curve (difference between 1-year and 10-year US bond yields)
C. Corporate bond spreads (measuring the implied risk of default of companies on their bonds)
D. Global Macro Risk index, summarising the stress in a variety of financial markets
For now, there are no signs of improvement in any of these 4 key indicators, suggesting that we have not necessarily yet hit the lows in this stock market fall.
Pick of the week: GDGB VanEck Gold Miners UCITS ETF

No respite from falling stock markets

After a turbulent week, stock markets are unsurprisingly deep into correction territory (STOXX Europe index -15% from highs, US S&P 500 -10%, UK FTSE 100 -9%), and are perhaps finally seeing a stock market selling climax - when investors rush for the exits and stock markets take a big dive on heavy volume.

Selling volumes on the Euro STOXX 50 index have accelerated

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Source: Bloomberg

Several sectors have suffered heavily over this last week as the market sell-off intensified, including Banks, Autos, and Travel & Leisure due to worries over the effects of financial sanctions, inability to do business in Russia and intensifying concerns that consumer spending will take a big hit from the combination of depressed sentiment and sky-high food and energy prices.

Europe Banks, Autos and Travel all down 20% since mid-January

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Source: Bloomberg

But in trying to determine whether the stress in financial markets is improving or getting even worse, what indicators should we pay…

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KevinS1

7th Mar '22

Hi Ed. Thanks for such a great article - a complex topic nicely distilled down to an easy to understand couple of measures.

Philip Thompson

8th Mar '22

Does a ticker exist for the global macro risk index?

Velo

There is such a ticker and it's the VIX (the volatility Index). It's a forward looking index.

Right now it's circa 36. Which is a bit concerningly high. So prices are falling but nowhere near market crash levels - in general.

Visually, the VIX functions in reverse, so -

When the VIX is high - prices are falling; and when the VIX is low - prices are bouyant and rising.

It hit an extreme high 90-ish in the 2008 peak crash period, and circa 85 at the peak 2020 March flash crash.

A year or two before each crash, the VIX was below 10 before both crashes, thus displaying that prices were at unsustainable highs.

Since 2008 the VIX has dropped steadily year after year, all the way until 2018 as prices rose generally over that period.

From 2018 onwards, rather alarmingly both highs and lows, have seen higher highs and higher lows, each year in general, with March 2020 being an extreme top at 85.

The sage's mantra goes:

Whe the VIX is high it's time to buy

When the VIX is low it's time to go slow.

Caduceus

Thank you for this, very useful... I was wondering, which VIX should we follow? There is a VIXL (widomtree) one on here and a bunch of ETFs, on TradingView there is the S&P500 one and other Volitility Indexes from different sources? Not sure which to follow?

Rusty2

You want the Volitility index, it's on Ig Group (LON:IGG), currently around 32. There is also a EU index currently around 36. Also can view on google. You can trade these in spreadbets/CFD accounts. £VIXM you maybe able to buy on some platforms.

Lee, there's only ever been one VIX for me to follow, and that's the S&P 500 VIX index.

If the world's No:1 market sneezes, we here in the UK (and markets around the world) catch a cold. So I keep it in my watchlists and always try to align as best I'm able, not to be investing in opposition to what the VIX is doing.

Thank you buddy. Grateful for the advice.

Thank you pal.

Market Musings 05/03/22: Key Market Indicators to Watch