An Extreme Level Of Equity Market Fear

Summary

• Can fear measures get to a level more extreme than today? They did during the great financial crisis (GFC), but we do not think the current environment is like the 2008/2009 market period.
• Near the equity market open yesterday morning, trading was halted for 15 minutes as the equity market circuit breaker was triggered with a 7% market decline.
• Then investors had to contend with a near 25% drop in oil prices due to Saudi Arabia and Russia disagreeing on oil production levels. For consumers though, lower oil prices should translate to lower gas prices at the pump, a bit of a silver lining.

Can fear measures get to a level more extreme than today? They did during the great financial crisis (GFC), but we do not think the current environment is like the 2008/2009 market period. Near the equity market open yesterday morning, trading was halted for 15 minutes as the equity market circuit breaker was triggered with a 7% market decline. Then investors had to contend with a near 25% drop in oil prices due to Saudi Arabia and Russia disagreeing on oil production levels. For consumers though, lower oil prices should translate to lower gas prices at the pump, a bit of a silver lining.

With this said the equity put/call (P/C) ratio ended above 1.0 to close at 1.12 yesterday. As noted in several earlier posts, the equity P/C ratio tends to measure the sentiment of the individual investor by dividing put volume by call volume. At the extremes, this particular measure is a contrarian one; hence, P/C ratios above 1.0 signal overly bearish sentiment from individual investors as they seek equity market downside protection by purchasing put options. Again, as a contrarian measure, individual investors tend to buy this protection at or near market bottoms.

The CNN Business Fear & Greed Index is nearing its zero limit and closed at 3 yesterday, an extreme fear level. I like to highlight this measure as it incorporates a number of sentiment measures in one overall reading.

The VIX Index is incorporated in the Fear & Greed Index and is an implied volatility index that measures the market's expectation of 30-day S&P 500® volatility implicit in the prices of near-term S&P 500 options. With the VIX, and the reason it has been called the "investor fear gauge," it historically hits its highest levels during times of financial turmoil and investor fear. As markets recover and investor fear subsides the VIX level tends to drop. The VIX closed at 54.46 yesterday and is at its highest level other than the level reached during the peak of the GFC.

And finally, the number of new lows that exceed new highs on U.S. markets is beginning to reach levels indicative of an oversold market. The below chart shows the reading using a cumulative five day period. Not shown is the one day change which is at its lowest level other than during the GFC.

So what does this all mean? In short the equity market is oversold. The uncertainty surrounds the unknown impact on the economy, in terms of severity and duration, that is caused by businesses and organizations limiting activity due to the virus outbreak. Given the extent to which some market sectors have declined though, investment opportunities are beginning to unfold.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[jprizzuto]

opec and opec+, negotiating together to fix prices by curbing supply is the antithesis of fair market capitalism - where competing entities seek to optimize their own self interest in a competitive marketplace.

we are on our way to true(er) price discovery and fair market capitalism in the oil market...YAY!

the oil market will survive. some oil and gas companies or energy dependent economies/ regimes will suffer more then others. many will fail. some will be much stronger on the other side.

consumers will benefit. isnt that the way is should be?
the hell with opec!

[powercise]

Fear? Just wait. Do you not understand what is going to happen? The US already has thousands of cases walking around due to the terrible roll out of the testing. The health care system is designed to make a large profit, prepared for the approximate number of care instances they anticipate, very little excess capacity. The system is already close to maxed out this time of year due to the regular flu. In the next month the system will crack with the added Covid cases. What level of fear do you think there will be once all the headlines are about old people dying while lying in the hall ways of hospitals? This right now is the relatively calm phase.

[Curve Tech Investing]

@powecise I would place your scenario as the most dire scenario that I think likely, but definitely possible. The facts is that we definitely have thousands of undocumented cases of the novel coronavirus in the US. We know that because we have so many infections that can't be connected to a known source of the virus and testing has barely begun. The US response has been terribly inadequate. Our fate was sealed when Trump axed the pandemic response team in the White House and cut CDC funding. That explains why we have known about the novel coronavirus for months, but are only starting to ramp up testing now.

[Maga infinity]

Nothing to fear my friends! Fed is your friend; and you should trade accordingly. I bet we will see all time highs by the end of this month. Fed will kill the virus with more cuts; and Trump will make America Greater Again. MAGA

[Phil Dumfee]

You should have bought with both hands before lunch.