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Investors gird for scarier days in markets

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[October 11, 2014]  By Caroline Valetkevitch
 NEW YORK (Reuters) - Volatility has suddenly returned to U.S. stocks, and for the first time all year it doesn't appear that the weakness in equities will go away quietly in the span of a few days.

While the S&P 500 is still up 3.1 percent for the year, the index is off about 5 percent from its record high reached in mid-September, and closed out this week at the lowest level since May 23.

"We're still in a bull market, but in the near term things are a little bit dicey, and I don't think the decline is over with yet," said Jeffrey Saut, chief investment strategist at Raymond James Financial in St. Petersburg, Florida.

The S&P 500 and Nasdaq posted their biggest weekly declines since May 2012, and the Dow Jones industrial average ended Friday in negative territory for the year.

The S&P also posted back-to-back intraday moves of more than 40 points this week for the first time in three years. Wall Street's fear gauge, the CBOE Volatility Index <.VIX>, ended at 21.24 on Friday, its highest level since early February.

Investors said they were concerned about the eventual end of Federal Reserve stimulus, as well as weak growth overseas and its potential effect on U.S. earnings. The slide in oil prices has also served as a harbinger for poor demand, and investors in general got caught betting heavily on further market gains at a time when this stew boiled over.

The volatility recalls the last major period of big market gyrations in the second half of 2011, when the first-ever credit downgrade of the United States and the threat of a debt default kept investors on their toes for several months. It is unclear whether the current turmoil will last as long.

"What is interesting about what is going on is that you have several themes all feeding into the same action, and that action is to mitigate risk," said Peter Kenny, chief market strategist of Clearpool Group in New York.


The only S&P 500 sectors to gain since the market's Sept. 18 high are defensive - utilities and consumer staples. This week also saw the biggest weekly inflow on record to U.S. taxable bond funds, while nearly $7 billion left stock funds.

One sign that investors anticipate more volatility has been in the options market, where volumes have increased sharply. Friday marked the busiest day in the options market since June 2013, with options volume totaling 27.2 million contracts, according to options analytics firm Trade Alert.

In addition, the CBOE Volatility Index is trading higher than monthly VIX futures contracts between now and May 2015, a sign of worry about near-term ups and downs in the market.

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"Just look at options volume versus stocks volume over the past three to six months," said Tim Biggam, lead option strategist at online brokerage TradingBlock.

"Options volume has been nothing but growing and stock volume has been sort of petering out. A lot of the big players are pre-positioning with options."

Growing worry over Europe and other overseas economies has money managers concerned about earnings season. The next two weeks bring a slew of U.S. corporate results, including from S&P 500 companies with some of the highest levels of sales abroad, such as chip maker Intel Corp <INTC.O>.

A disappointing outlook from Microchip Technology <MCHP.O> late Thursday has put a negative spin on the chip sector's outlook. The PHLX semiconductor index <.SOX> saw its largest daily percentage decline since January 2009, ending down 6.9 percent on Friday. It lost as much as 15 percent since hitting a 13-year high less than a month ago.

Should U.S. results prove strong, however, it may stem the recent selling.

"The earnings reports from the U.S. should help put a bottom in the market and lead to some regained strength. We think we remain in good shape," said Jim McDonald, chief investment strategist at Chicago-based Northern Trust Asset Management, which has about $924 billion in assets.

(Reporting by Caroline Valetkevitch, additional reporting by Saqib Ahmed, Chuck Mikolajczak and Rodrigo Campos; Editing by David Gaffen and Nick Zieminski)

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