Select Page

At the end of the day, the move in the Standard & Poor’s 500 wasn’t all that large–just a drop of 0.24% to 2474.92. (Although these days, that’s a big decline for U.S. stocks. You have to go back to the beginning of July to find a bigger tumble.)

But intraday the action was a lot bigger. The S&P 500 broke higher out of the gate climbing to a high of 2490.63 from the 2478.35 open at 12:10 p.m. New York time. And then it fell to that close at 2474.92.

You can make an argument that the tumble from the day’s high was a result of a Washington Post story saying that North Korea had produced miniature nuclear warheads capable of being loaded on a missile aimed at the United States. The story put the number of such  warheads in the North’s inventory at 60.

And I’d certainly argue that the market continued to drop because of comments by President Donald Trump saying that North Korea “will be met with fire and fury and frankly power, the likes of which this world has never seen before.” Even a market that has gotten accustomed to this administration’s rhetoric took those comments to heart.

But you can also make the argument that today’s reversal, or at least the first stage of that reversal, had very little to do with Presidential rhetoric. The financial sector, which has been a big driver in recent moves higher, peaked today at a technical level that might have, the news on North Korea aside, produced a wave of computerized selling. The Financial Select Sector SPDR ETF (XLF) peaked for the day at $25.58 at 12:13 and then dribbled down to close at $25.28.

So what is cause and what is effect here? Did the Financial SPDR, which has been leading the market up, lead the S&P 500 down today–independent of the news? Or did the news on North Korea produce a decline in the entire market that took the Financial SPDR down with it.

It matters.

We had a big, if not huge, move up in volatility on the CBOE S&P 500 Volatility Index (VIX) today with that index up 10.37% to 10.96. That kind of move in this index–which indicates selling to protect against a drop in the S&P 500–is what we see when investors and traders decide to hedge the market as a whole against a big geopolitical event–military acton in Korea, for example. The VVIX, the CBOE VIX Volatility Index, which tracks volatility in the VIX index, moved up 9.63% today to 98.68. Many traders see the 100-level on the VVIX as a sign to get ready for volatility ahead. (Although it usually takes a jump to above 110 on the VVIX to reliably signal a big move in volatility in the market as a whole.)

If the market was reacting today, or thinks it was reacting today, to North Korean threats and U.S. promises of retaliation, then I think we can look for a higher VIX (and VVIX) in the days ahead as traders and investors hedge their gains in this market.

If on the other hand, today’s intraday reversal was just a technical move of the kind you get as a rally moves higher and traders jump on a chance to make a buck when the market or a sector gets ahead of itself, then within the next few days we’ll see a return to the boring days of low volatility and stock prices that are steady creating higher highs

I suspect that it will take at least a few days before North Korea, which has decided to be deeply insulted by the latest round of sanctions, decides that it has had its fill of aggressive rhetoric–for a while and only until the next missile test. But it’s always hard to predict what a deeply paranoid regime will do.