Dow futures were in recovery mode Monday night, pointing to another 'dead cat bounce' scenario on Tuesday.
Futures on the Dow and broader U.S. stock market rebounded late Monday, as investors reacted to encouraging signs from world governments that stopping coronavirus had become a top priority.
Just a few weeks ago, many politicians including President Trump had shrugged off coronavirus as no more than a glorified flu. Now, countries are under lockdown to contain the spread of the disease.
After recording its worst drop in history Monday, the Dow Jones Industrial Average appears poised to recover a portion of that loss. Futures on the benchmark index rallied by as much as 800 points Monday night to reach a high of 21,061.00.
S&P 500 futures rose 3.6% to 2,492.75. Futures on the technology-focused Nasdaq Composite Index gained 3.4% to 7,277.25.
The majors crashed by at least 12% on Monday, with the Dow shedding 12.9% over fears that coronavirus was devastating the world economy.
Those fears aren’t entirely misplaced.
On Monday, China reported one of its worst batches of economic data in history, with key metrics like retail sales, industrial production and fixed-asset investment crashing 20.5%, 13.5% and 24.5%, respectively, in February.
February was a brutal month for the Chinese economy:
The historic selloff was stoked by an unusual level of volatility – one of the highest on record, as a matter of fact.
The CBOE Volatility Index, commonly known as the VIX, spiked 43% on Monday to reach 82.69 on a scale where 20-25 represents the median range. Basically, anything above 20 on the VIX implies higher than normal downside volatility.
On an intraday basis, VIX peaked at 83.56 Monday, which is about six points shy of the October 2008 high.
It’s not just coronavirus that’s unleashing fear and panic in the market. Preset algorithms that execute computerized trades are increasingly responsible for today’s extreme levels of volatility.
As The Wall Street Journal notes, these algorithms are…
dictated by a series of inputs. And one of the most important of these inputs is the market’s own volatility.
The spike in Dow futures Monday night is most likely a dead cat bounce, which isn’t uncommon following huge dips the day before. A convincing response from world leaders that they are committed to containing the spread of coronavirus may have also played a role.
For now, if we use VIX as a benchmark, markets are more or less at peak volatility. The panic sale could give rise to bargain hunting on Tuesday as investors search for relief.
As Mark Yusko recently tweeted (in reference to bitcoin but still applies to stocks), periods with huge downside volatility are usually followed by periods of ‘guaranteed’ upside volatility. That’s just how averages work.
Still, based on recent price action, a sustained recovery in the U.S. stock market appears highly unlikely at this point.
U.S. stocks entered a bear market earlier this month:
This article was edited by Josiah Wilmoth.