The S&P 500 reached another all-time high last week before profit taking took the index lower by a few percent. Everything is still on trend, the US$ is also playing ball, yields are off, and there is everything to like about the state of the markets. So why was the VIX, which indicates the perceived risk in the markets, some 30% higher than this time last week?
We are at the start of earning season and people always buy a bit of protection from misses in expectations that could lead to large selloffs. However, there seem to be other factors at play and the clues are in the performance of the individual sectors. Big Tech came off hard, but that was to be expected after an exponential run that took the Nasdaq above 20,000.
The big surprise came from the performance of small cap stocks, up more than 10% at one point before drifting lower but still hanging on to more than half the gains. The froth was also up big, with regional banking stocks almost 20% higher and investors also rotated into anything that had hereto underperformed the most.
What this is telling us, is that investors are embracing taking more risk as they rebalance their portfolios. That’s good, because the net exposure to equities hasn’t changed, which should lend support for the overall market. That’s bad, because some of the things investors are buying may have been down for a reason. If sentiment turns, it could get ugly, and that’s what the risk markets are telling us.
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