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The VIX Is Dangerously Close to a Tipping Point

Stocks soared on Thursday thanks to the largest gain by transportation stocks since 2001

stocks - The VIX Is Dangerously Close to a Tipping Point

Source: 401(k) 2012 via Flickr

Stocks soared on Thursday thanks to the largest gain by transportation stocks since 2001 and a rally in Treasury bonds as fears China could slow its bond purchases — the reason for some market unpleasantness earlier in the week — faded away after officials essentially labeled the report fake news.

In the end, the Dow Jones Industrial Average gained 0.8%, the S&P 500 gained 0.7%, the Nasdaq Composite gained 0.8% and the Russell 2000 gained 1.7%. Crude oil dipped slightly, gold climbed, the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT) gained 0.4% and the dollar fell.

Airlines and marine transport stocks led the way with gains of 4.2% and 3.9%, respectively. Utilities and railroads were the laggards, down 1.7% and 1.3%. KB Home (NYSE:KBH) gained 12.3% after reporting better-than-expected quarterly results. Eastman Kodak Company Common New (NYSE:KODK) fell 22% after its recent blockchain-related surge deflated on profit taking.

KODK stock

The rise in transportations stocks caps an eight-day consecutive rise, totaling 6.5% for the year-to-date thanks to strength in airline stocks. Given that transports are seen as being on the “front lines” of the economy, this suggests investors are aggressively pricing in a surge in GDP growth.

transportation stocks

Breadth was extremely positive, with advancers outpacing decliners by a 3.4 to 1 ratio. On the NYSE, 291 issues hit a new high (vs. 37 hitting new lows).



The most interesting development was that the CBOE Volatility Index rose in unison with the market today — a break of the longtime inverse correlation and a potential regime change to the situation that marked the final stages of the last two bull markets. That is, when both volatility expectations and stock prices rise together.

This comes at a time when Wall Street brokerages, including Goldman Sachs, Deutsche Bank and Bank of America are warning of very extended small trader positioning in short VIX ETF products — potentially setting the stage for a violent reversal as these positions are closed.

It wouldn’t take much of a rise in the VIX — an increase from around 10 to around 15 — to force some $110 million in short covering buying according to JPM’s head quant Marko Kolanovic. Goldman puts the tipping point at just an increase of 3.

Check out Serge Berger’s Trade of the Day for Jan. 12.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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Anthony Mirhaydari is the founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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