Good News: We May Have Hit The Bottom, Bad News: Expect Continued Volatility
Stocks had one of their most volatile days last week when a measure of volatility rose to its highest level in 10 years on Thursday.
The widely watched CBOE Volatility Index [^VIX|^VIX] measures the amount of fear among traders and investors. The higher the VIX, the higher the level of fear. The index typically trades around 15 and moves inversely with the S&P 500 [^GSPC|^GSPC].
Looking back at past bear markets, the bottom is usually marked by a significant jump in the VIX, so it’s usually a good predictor of a market bottom. The VIX shot up to 42.16 on Thursday, when the S&P 500 was at its session low of 1,133.50.
That was the VIX’s highest reading since October 8, 1998, when the stock market plunged to its lows of the 1998 bear market. The VIX hit 44.92 on July 23, 2002, also the low of 2000-2002 bear market. If Thursday wasn’t the bottom, than the markets may be close.
However, don’t expect volatility to ease up anytime soon. It took the VIX almost a year after its 2002 peak to settle back to a regular level of under 20. So get ready for more volatility this week as a number of companies report earnings including 3Com Corp.
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PowerRating), Lennar Corporation
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PowerRating), Bed Bath & Beyond Inc.
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PowerRating), Nike Inc.
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PowerRating), and Research In Motion
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PowerRating).
On Wednesday, Bed Bath & Beyond is set to report its second-quarter results after the close and analysts are forecasting a 16% drop in quarterly profit of $0.46 per share on revenue of $1.86 billion, according to Thomson Reuters. In the near-term, the stock favors a narrowing pattern, cutting back or reversing its evening performance in next-day trade in the last six quarters.
So longs may want to watch for where possible floors develop in the evening hours for entry targets to catch narrowing trend bounces. On June 25, 2008, the stock rallied 8.2% in after-hours trading following a Street beat. The stock narrowed its gains the following session, ending up 4.2%.
On Thursday, Research In Motion is due with its second-quarter results after the bell and is expected to report a 74% increase in earnings to $0.87 per share on revenue of $2.59 billion, according to analysts polled by Thomson Reuters. Shares are a mixed performer following earnings releases.
The stock has seen its after-hours move widen in next-day trade in nine of the last 18 quarterly reports. The near-term pattern is mixed as well. In the last four quarters, the stock has widened twice and reversed direction twice.
On June 25, 2008, shares fell 7.6% in after-hours after the company’s first-quarter results missed the Street and its earnings guidance was below estimates. Shares extended their declines, dropping 13.3% the following regular session.
Cassie Slane is a Senior Editor at www.MidnightTrader.com.