Wall Street triumphs in the pandemic and these are the reasons 0:56
(CNN Business) ––
Throughout the summer, signs grew that the meteoric rise in the stock market was unsustainable.
Bullish investors drove Tesla's market value to about the same as JPMorgan Chase and Citigroup combined.
Apple's $ 2 trillion market capitalization recently surpassed that of the 2,000 companies that make up the small-cap Russell 2000.
And the futures market valuation of the S&P 500 rose to levels never seen since the dot-com bubble.
Euphoria was clearly gripping the financial markets.
Tesla makes its shares available to the public 1:25
Wall Street's runaway train finally derailed on Thursday, when the Dow index plunged 1,026 points, or 3.5%.
It closed 808 points down, or 2.8%.
The Nasdaq fell as much as 5.8% as pandemic winners like Apple, Zoom and Peloton plunged.
Even the mighty Amazon is down 5%, although it is still up at an incredible 82% on the year.
Now, the question is whether the market recovery will get back on track quickly or whether this is the beginning of a major pullback in the stock market.
A warning sign that suggests there could be more turbulence on the way is the unusual movements in the VIX volatility indicator, closely watched.
Typically, the VIX is muted when US stocks are at record highs.
But some market analysts have been concerned in recent days that the VIX continued to rise, even as the S&P 500 hit new highs.
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In fact, the VIX peaked at an all-time high for the S&P 500, according to Bespoke Investment Group and Goldman Sachs.
The previous high was set in March 2000 during the dotcom bubble.
"It's a major red flag," Daryl Jones, research director at Hedgeye Risk Management, told CNN Business.
«The market is at a very risky point.
The danger of a market crash increases. '
When US stocks rise and the VIX remains low (and often low), this is usually a green light for investors.
You want to chase that.
But a higher stock market due to higher volatility is telling you that the risk is increasing, ”Jones explained.
"Worrying sign"
The VIX is just 33, well below the closing record of 86.69 set on March 16 when the pandemic threw the world into chaos.
Back then, it made sense for the VIX to rise.
The S&P 500 had just suffered its worst day since 1987. The Dow lost an impressive 2,997 points, or 12.9%.
Selling was so extreme that trading was halted on the New York Stock Exchange for 15 minutes that day.
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But the financial markets today are in a completely different world, one that would normally involve a much lower VIX.
The S&P 500 ended at an all-time high on Wednesday, a whopping 60% from its March 23 low.
The Dow even closed above 29,000 for the first time since February.
CNN Business Fear & Greed's market sentiment index was solidly in "extreme ambition" mode.
"This is a worrying sign," Jim Bianco, president of Bianco Research, said of the high level of the VIX.
Bianco noted that volatility tends to drop when stocks rise because investors feel less need to buy the VIX as insurance against a fall.
But that pattern has been broken.
"When prices go up in a way that worries people, the market is excessive and there is volatility and rising prices, that is typically unsustainable and a correction is made," Bianco said.
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Wall Street's epic rally has been fueled by incredible levels of emergency aid from the Federal Reserve, which cut interest rates to zero, bought trillions of dollars in bonds, and vowed to stay on top of the situation for as long as necessary.
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The Fed bailout is at the top of record levels of aid from the federal government.
Investors have also been optimistic that a vaccine will be widely available before long, although Dr. Anthony Fauci, the nation's leading infectious disease expert, dimmed hopes a bit on CNN Thursday.
The most surprising part of the rise in the VIX is that it runs counter to Fed money that is designed to keep volatility in check.
Jones, the Hedgeye executive, compared the Fed's efforts to reduce volatility to shoving a ball underwater.
"Ultimately, the underwater ball floats up and jumps higher," he said.
But Randy Frederick, vice president of trading and derivatives at Charles Schwab, said concerns about the VIX surge alongside the stock market are "a little overblown."
"It's more of a caution flag than a panic button," said Frederick.
Pre-election fear
First, he pointed to the fact that the VIX does not usually anticipate market downturns as much as it reacts to them.
Second, Frederick argued that there are very legitimate reasons for investors to be nervous right now: the impending election and the pandemic.
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"We have a very unusual situation here," he said.
"We are facing a highly contested election in just 60 days and we still do not know when we will have a vaccine to get out of this mess."
Goldman Sachs strategists noted in a research note for clients Thursday that VIX futures contracts in early November soared, likely due to "investor fears about high volatility surrounding the US elections."
In particular, the Wall Street bank said investors are likely concerned that the election results "will take longer than normal to process."
Paul Hickey, co-founder of Bespoke Investment Research, said that while there are explanations as to why the VIX is so high, that doesn't mean it should be minimized.
"The market has been on a great streak," Hickey told CNN Business in an email, "so when we hit a bump in the road, the reaction is more likely to be more exaggerated than if we come slowly."
Betting against this rally has been reckless, if not dangerous.
But it won't go up forever.
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