Market Risk Lurks

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Market Moves

Although the S&P 500 index (SPX) closed higher on the day, so did the Volatility Index (VIX). This dynamic usually implies that market makers see risk lurking in the shadows and need to increase option prices in order to compensate for it. The combination of rising volatility prices with rising index prices has also been noticeable in the comparison between the Nasdaq 100 (NDX) and the Volatility Index for the Nasdaq (VXN).

The chart below depicts an analysis of increasing risk price in volatility indexes by charting a 10-day moving average of the difference between VXN and the S&P 500 Volatility Index (VIX). This is useful to track because it compares risk across both leading indexes. When this moving average climbs for more than 10 days in a row while the S&P 500 index is also climbing (shown by the S&P 500 ETF SPY), it flashes a warning signal.

Over the past three years, this signal has occurred 12 times (shown on the upper panel of the chart). Seven of these resulted in falling prices on the S&P 500 (marked by a pink line), and five did not (marked by a blue line). The five occasions where the broad market index moved higher resulted in comparatively small moves upward, while the other seven were significantly sharp moves lower by comparison – implying that the signal is worth paying attention to when it shows up. 

The chart also shows that the recent action in index and volatility prices since the start of the year is the latest such signal. Traders should be wary of unexpected reversals in the market over the next two weeks or so.

Precious Metals Prices Pop

Precious metals prices rose today with State Street’s SPDR Gold Trust ETF (GLD) closing 0.5% higher while iShares Silver Trust ETF (SLV) closed a full 1% higher. However, both of these moves were overshadowed by what took place in GraniteShares Platinum Trust ETF (PLTM) and Aberdeen’s Standard Physical Palladium Shares ETF (PALL), both of which gapped higher and finished the day with more than a 3% increase. 

The chart below shows the relative performance of these metals in comparison to another favorite hedge among institutional investors, the utility sector as tracked by State Street’s utility sector ETF (XLU). Palladium’s rapid rise over the past six months is likely a combination of rising nervousness among investors and constrained supply of the metal.

Benefiting from Palladium Demand

The company that produces the largest amount of palladium is Anglo American Platinum Limited (ANGPY). Anglo American PLC is a British multinational mining company based in Johannesburg, South Africa, and London, United Kingdom. In addition to being the world’s largest producer of palladium, with roughly 13% of the world supply, it also produces around 40% of the world’s platinum output.

Anglo American Platinum shares trade in over-the-counter markets and are typically priced in U.S. dollars; however, the chart below depicts what these shares would look like if they were priced in gold rather than dollars. These shares are usually highly correlated with the moves in gold prices, but the chart below shows that when this correlation briefly turns negative, it may be an indication of a strong upward move to follow. 

The Bottom Line

Stocks closed near unchanged today, but Volatilty Index prices rose, creating a subtle warning signal that a significant downward move could be right around the corner. The fact that precious metals are on the rise may also be connected to the perception of elevated market risk. Among precious metals, palladium shows the most relative strength in price action over the past six months.

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