VIX Jumps 19% as Losses Worsen Below Surface of S&P 500: Options

Apr 08, 2014 6:23 am ET

(For an Options column news alert: SALT OMA.)

April 8 (Bloomberg) -- While two weeks of selling look like a blip on a chart of the Standard & Poor’s 500 Index, for the average investor it’s been a lot more painful.

Amazon.com Inc., Whole Foods Market Inc. and Transocean Ltd. are among 43 companies that have lost more than 20 percent from their 52-week high, data compiled by Bloomberg show. The average stock is down 9 percent from its most recent peak, according to Bespoke Investment Group LLC. Concern that the drop will worsen pushed the VIX to its biggest gain in three weeks.

The retreat that began in technology shares is spreading across the equity market, erasing this year’s gain in the S&P 500 and sending measures of biotechnology and Internet companies down more than 15 percent. For investors who are just coming back to equities after staying away for four years after the 2008 financial crisis, it’s a lesson in how quickly equities trading near records can reverse course.

“It’s definitely been a whipsaw in valuations,” Tom Stringfellow, president and chief investment officer of San Antonio-based Frost Investment Advisors LLC, which manages about $10 billion, said yesterday by phone. “There’s a lot of rotation under the radar where the benchmarks haven’t been hurt nearly as bad as some of the underlying stocks.”

High Flyers

Explanations for what sparked the declines range from the King Digital Entertainment Inc. initial public offering to selling before taxes due April 15 to the start of earnings season to losses at hedge funds and last week’s payrolls report. To Paul Zemsky, who helps oversee $200 billion at ING U.S. Investment Management, the confusion is typical of a rotation out of momentum stocks.

“The problem with high-flyers at high valuations is you don’t know what’s going to start that cascade down,” Zemsky, the New York-based head of multi asset strategies, said in a phone interview. “There’s no fundamental reason why the market has sold off.”

The S&P 500 has slipped 2.4 percent since reaching a record close of 1,890.90 April 2, losing 1.1 percent yesterday to close at 1,845.04. Over the same period, the Nasdaq 100 Index has dropped 4.3 percent, the worst three-day decrease since 2011. The Russell 2000 Index of small-cap shares is down 4.8 percent since April 2, data compiled by Bloomberg show.

‘Panicky Market’

Amazon.com has lost 22 percent since reaching a record in January, even as analysts’ estimates show earnings will triple this year. Shares of the world’s largest online retailer are up six-fold since the end of 2008 and have a price-earnings ratio of 562.41, data compiled by Bloomberg show.

Stocks outside of the technology industry have also been hurt. Starbucks Corp., MasterCard Inc., JM Smucker Co. and Mylan Inc. have fallen about 15 percent from their 52-week high.

“It’s a bit of a panicky market after dealing with a lot of negative news,” Anthony Valeri, a market strategist with LPL Financial Corp. in San Diego, which oversees $350 billion, said in a phone interview. “If you were playing some of these high- flying stocks and got in late, then it was bad for you.”

Since the start of March, gains in the U.S. market have been led by companies whose earnings are least tied to economic growth. Phone companies and utilities have risen more than 2.9 percent, while household products suppliers are up 1.9 percent. Technology and raw-material producers have fallen.

Swinging Pendulum

A similar rotation occurred in April 2013, when phone, utility, drugmaker and consumer staples companies had four of the five biggest gains in the S&P 500. The index climbed 16 percent from the end of that month through December.

“The market went to an extreme,” Todd Lowenstein, a fund manager who helps manage $16 billion at Highmark Capital Management Inc. in Los Angeles, said by phone. “Ultimately, the pendulum swings back and you’re seeing that finally happen now.”

The Chicago Board Options Exchange Volatility Index, known as a fear gauge because it rises when stocks fall, has climbed 19 percent in the past three days to 15.57. The CBOE NDX Volatility Index, tracking contracts on the Nasdaq 100, has jumped 22 percent to 20.05, a two-month high.

The stock-market retreat is a normal reaction to last year’s surge and represents a good buying opportunity, according to Eric Marshall, head of research at Hodges Capital Management Inc. He purchased airline shares during the selloff.

High Conviction

“This is really the time you want to focus on individual company fundamentals,” Marshall said in a phone interview from Dallas April 7. “We’ve been using the market’s volatility to buy things we have high conviction in.”

Equity investors added $4.7 billion to U.S. exchange-traded funds last week even as the S&P 500 retreated more than 1 percent in the last two days of the week, data compiled by Bloomberg show. Industrial stocks absorbed the most money, taking in $530 million over the five days, while traders withdrew cash from real-estate and technology ETFs.

Alcoa Inc., the largest U.S. aluminum producer, unofficially kicks off the U.S. quarterly earnings season when it releases financial results after the close of trading today. Profit for members of the gauge probably climbed 1 percent in the period, analysts now forecast, after anticipating a 6.6 percent rise in January, data compiled by Bloomberg show.

Concern that companies aren’t generating enough earnings growth to justify valuations has driven the declines in U.S. equities, according to Tim Ghriskey, chief investment officer at New York-based Solaris Asset Management LLC. The S&P 500 trades at 17 times earnings, a 22 percent increase over the past two years, data compiled by Bloomberg show.

“There doesn’t seem to be much support for stock prices heading into earnings,” Ghriskey said by phone yesterday. He helps manage about $1.5 billion. “The market is anticipating a not-very-good quarter. Everybody expects weather to have affected first-quarter earnings.”

--With assistance from Gerrit De Vynck and Eric Lam in Toronto.