The most complacent stock market in history was shocked to attention last week after fiery comments from President Donald Trump about North Korea ratcheted up geopolitical tensions worldwide.
The S&P 500 dropped 1.5%, the most since May, as investors sought the relative safety of Treasury bonds and gold, clearly shaken by the potential for military escalation.
The benchmark index bounced back in a big way on Monday, climbing more than 1%, showing that there’s still appetite for buying on weakness. It’s a dynamic that’s played out time and time again over the eight-year bull market, and it’s helped keep the rally afloat through some tough times.
But there are cracks forming in the foundation of the equity rally slowly but surely. If you know where to look, there’s no shortage of signs investors are feeling increasingly uneasy.
Here are three charts that show stock traders are not as confident about the market as Monday’s relief rally would have you believe:
Thursday's 44% spike in the VIX brought the fear gauge's three-day increase to 62%, which was the most since mid-2015 for a period of that length. This is significant because Trump's verbal escalation of the North Korea situation was deemed to be more anxiety-inspiring than some other major geopolitical events.
When faced with the UK's decision to leave the European Union, stocks sold off sharply, yet the VIX didn't spike to the degree it did last week. The fear gauge also failed to reach recent heights from just after the US presidential election, one of the biggest sources of market uncertainty in recent years.
Now that we've discussed the VIX, what about expected volatility on the fear gauge itself? There's a handy measure for that, the CBOE VIX Volatility Index, or VVIX.
While the VIX spiked the most since May last Thursday, the VVIX did it one better, rising by the most since August 2015. In fact, the ratio of the VVIX relative to the VIX reached the highest ever, according to data compiled by Goldman Sachs.
Goldman isn't yet ready to say the volatility regime is shifting entirely, but the historically high ratio signals that markets are already bracing for more turbulent conditions.
The worry that rocked stocks worldwide last week was no more prevalent than in the South Korean market. The MSCI South Korea ETF (EWY) dropped 2.5% on Thursday, and fell 4.6% for the week.
Even more intriguing was the enormous volume in put contracts betting on a decline in EWY. It reached almost 70,000 units on Thursday, the most since early 2014, and totaled roughly 125,000 for the week, according to data compiled by Bloomberg.
Clearly investors are adopting a defensive, if not outright bearish, stance on South Korean equities as tensions boil. However, as Strategas Research Partners points out in the chart, the surge in put volume could be considered bullish -- the logic being that the resulting weakness makes it easier to buy the dip, and also that sentiment isn't getting overextended to the upside.