Gold and oil markets closed higher, while stocks surged to yet another unprecedented close. The Volatility Index (VIX) maintained its subtly divergent action, suggesting to chart watchers everywhere that some well-informed traders may be worried about pending price drops.
The chart below shows how this peculiar anomaly in VIX prices has continued. (Note that this was first mentioned in yesterday’s edition of Chart Advisor.) This chart was captured 20 minutes before the market closed and shows the subtle yet easily discernible disparity between the VIX and State Street’s S&P 500-tracking index (SPY). In the closing minutes of today’s session, the VIX fell, but not enough to fully reconcile the divergence.
It is interesting to note the timing of this anomalous divergence. This is strong evidence that the market simply does not care about the presidential impeachment proceedings. As the news broke last night that this event had occurred, something that was uncertain was now certain. Typically, such a dynamic creates a reduction of risk pricing. But since this has not occurred, it seems that traders were not worried about it.
On the other hand, it may be that traders merely see different risks down the road, or that they are far more focused on trade talks than on impeachment. In either case, impeachment has not shaken the markets. Historically speaking, this seems like a rather surprising footnote.
Pharmaceutical Companies Show Strong Performance
With markets surging higher even as the price of put options remains higher than usual (as evidenced by the slightly elevated VIX pricing), long-time market watchers might jest that investors are high on drugs. The reality is that they might just be – in a manner of speaking.
The chart below shows how State Street’s SPDR S&P Pharmaceuticals ETF (XPH) has turned in an eye-popping 22% return since October. For comparison purposes the chart also shows several stocks within the index, including Amgen, Inc. (AMGN), GlaxoSmithKline plc (GSK), AstroZeneca plc (AZN), Merck & Co., Inc. (MRK), Pfizer Inc. (PFE), and also Eli Lilly and Company (LLY), which recently reported surprisingly positive earnings.
There is no mystery in the idea that these stocks have been moving higher on good news. The more interesting component afoot here is that they have been occurring with such intensity in coincidence with the move in small-cap stocks. Pharmaceutical stocks are well known as high-risk, high-reward investments. It seems unusual that investors are seeking higher-opportunity investments when stocks have extended an already lengthy bull market.
Small- and Micro-Cap Stocks Maintain Their Lead
Not only small-cap stocks, but also micro-cap stocks have led other classes of stocks over the past two months or so. The chart below compares the iShares Russell Microcap index fund (IWC) and Russell 2000 Small Cap index fund (IWM) to Invesco’s Nasdaq 100 fund (QQQ), State Street’s S&P 500 fund (SPY), S&P 500 Growth fund (SPYG), and the SPDR Dow Jones Industrial Average fund (DIA). It appears that investors may be anticipating the arrival of something called the January effect. Such early investing may nullify later gains, creating a lackluster January.
The Bottom Line
Stocks moved to historic highs, led by small-cap, micro-cap, and tech stocks. The Volatility Index continued to hang on to a bit of its extra risk pricing. Pharmaceutical stocks have been showing strong performance, suggesting that investors are eager to find opportunity despite worries and risks.
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