TPA uses 2 benchmark risk measures as indicators of stress in the marketplace. One is the VIX, the Chicago Board Options Exchange’s CBOE Volatility Index. This index derived its pricing from S&P500 Put Options. The other risk measure, the one TPA prefers, is the High Yield Spread (CSI Barclays High Yield Index), which looks at the spread of high yield bonds over investment grade bonds. Both of these indexes have spiked recently as risk tolerance has waned. Chart 1 shows the VIX, the High Yield Spread, and the S&P500 benchmark index since the mid-1990’s. Note that when the risk measures spike, stocks have problems.
Chart 1 also shows that the recent spike of the high yield spread was matched in 2001-2002 and 2008-2009, but only in 2008-2009 by the VIX. (TPA has mentioned the parallels between the current market and 2008 many times in the past 6 weeks.) Now, TPA sees if we can get any clues from the 2001-2002 and 2008-2009 periods as to when we can expect the current market crisis to pass.
TPA uses a simple index that combines the VIX and high yield spread in Chart 2. The chart shows the combined risk index in the top panel and the S&P500 in the lower panel and highlights the 2001-2002, 2008-2009, and the current period. Chart 4 uses the same chart, but highlights the high points for the combined risk measure and the market cycle lows in 2002 and 2009. Note that the high point for the risk measure in 2002 was 8/5/02 and the low for the S&P500 occurred 65 calendar days later on 10/9/02. The high point for the risk measure in the 2008-2009 period was 11/20/08 and the low for the market was 109 calendar days later on 3/9/09. In each case there was a lag of at least 2 months between the risk measure high and the market low.
The table below attempts to estimate the timing of a potential market low this time around using an average of the 2001-2002 and 2008-2009 periods. The average days between risk measure high and market low is 87 days. If the risk measure high this time around was already put in on 3/16/20, then we should expect the market to bottom approximately 87 days later or 6/11/20. This is, of course, a very rough measure. The point, however, is that there should be a lag between the height of risk avoidance and the market low. If the market low is to remain 3/23/20, that would mean the height of perceived market risk and the market low were separated by only 7 calendar days this time around. That does not seem to square with history.
HIGH YIELD SPREAD, VIX, S&P500 – 1992-2020
TPA COMBINED RISK MEASURE (VIX+HIGH YIELD SPREAD) – SINCE 1990
TOP: TPA COMBINED RISK MEASURE. BOTTOM: S&P500. 1991-2020
TOP: TPA COMBINED RISK MEASURE. BOTTOM: S&P500. 1991-2020. RISK HIGHS & MARKET LOWS.