Equity Risk Premium Collapses; A Day Of Notable Moves; VIX Not Jumping
-
Jason Goepfert
Published: 2018-12-20 at 11:23:14 CST
This is an abridged version of our Daily Report.
Equity premium collapses
The premium that investors are willing to pay for stocks’ earnings has collapsed relative to the yield available on bonds. The one-year z-score of the Equity Risk Premium is now 4 standard deviations below average, a rarely-achieved extreme since 1972 with positive implications.
When the ERP was +2 or higher, the S&P’s annualized return was -4.0%, versus 6.8% when it wasn’t extreme at all. And when it was below -2, the annualized return shot up to 40.1%.
Quite a day
Wednesday’s drop triggered a number of notable moves.
* The Dow Transportation Average fell into a bear market, which has not been the negative signal it’s suggested to be.
* Nearly 60% of Financials fell to a 52-week low, 5th-most out of all days since 1990.
* A big intraday gain turned into a big closing loss for the first time since 2009.
* And stocks fell by one of the largest amounts in more than 20 years on a day the FOMC announced their rate policy.
Where’s the fear?
People tend to obsess on the VIX as a measure of “sentiment” and while it can be a good tool, it’s not the end-all, be-all, especially since the explosion in volatility ETFs may be impacting how the entire volatility complex may be trading. Regardless, there have been 32 days since 1992 when the S&P 500 was down 1% or more than the VIX was either unchanged or down. Over the next month, the S&P rose 81% of the time, averaging 2.4%.
Related Posts:
- Traders are panicking the most since the pandemic
- Yield curve collapse suggests near term caution
- Gold miners have a lot to prove
- Using options to trade a positive seasonal window in TLT
- Junk bonds are trying to recover but remain suspect
Tagged As:
The post titled Equity Risk Premium Collapses; A Day Of Notable Moves; VIX Not Jumping was originally published as on SentimenTrader.com on 2018-12-20.
At SentimenTrader.com, our service is not focused on market timing per se, but rather risk management. That may be a distinction without a difference, but it's how we approach the markets. We study signs that suggest it is time to raise or lower market exposure as a function of risk relative to probable reward. It is all about risk-adjusted expectations given existing evidence. Learn more about our service , research, models and indicators.
Follow us on Twitter for up to the minute analysis of market action.
Follow @sentimentraderNot ready to signup up for a free trial yet?
Signup for our Daily Lite email to receive highlights of our daily report, research and studies.
Follow us on Twitter:
Follow @sentimentraderSubscribe to our Youtube Channel:
RSS Feed
Subscribe to the Blog RSS feedTags
Recent Blog Posts
Brought to you by:
>