The U.S. stock market indexes stayed in a narrow trading range and generally closed today slightly higher than the day before. On such days, it is usually quite predictable that the CBOE Volatility Index (VIX) of the S&P 500 will close slightly lower. This is especially true on a day after a significant news event that rattles the markets, because it reflects the behavior of investors who, at first, are highly nervous about such an event, but on the day after may have begun to calm down.
So it is no surprise that the VIX closed the session slightly lower. But what did surprise seasoned market watchers was that iPath S&P 500 VIX MT Futures ETN (VXZ), an exchange-traded fund that reflects price changes in 90-day forward volatility futures, closed the day significantly higher. This appears to indicate that commercial traders and other well-informed market participants see growing signs of risk that, while not immediately imminent, must be factored into the pricing of anticipated future volatility.
This price action is easily explained by the news of the drone attacks in Saudi Arabia and traders' concern that this may lead to greater uncertainty in asset prices. The narrow trading range for the day is easily explainable from the upcoming Fed statement scheduled to be delivered at midday tomorrow.
Investors Poised to Move Money from Stocks to Bonds
What is not easily explained is what investors might do if they do, or don't, like what the Fed directors have to say. One likely move, however, is that investors may shift money from stocks to bonds. This is a historically consistent reaction, and while stocks are pushing to new highs, bonds appear to be rebounding within their long-standing upward trend.
Driven by falling interest rates that have not spurred inflation, stocks and bonds are showing an upward price trend, while the commodities have drifted lower. Recent price action may reverse the trend for commodities, but what impact might that have on stocks or bonds?
Will Canadian or U.S. Oil Companies Benefit More in Coming Months?
With the reduction in oil exports coming from Saudi Arabia, it may be interesting for investors to contemplate which countries are likely to take up the slack and benefit most from the resulting price activity in the markets. An in-depth analysis would be a lengthy and complicated endeavor, but the markets might provide a hint when comparing a prominent oil company in one nation with a similar company in another nation.
Consider the following example (see chart below) that compares Canadian Suncor Energy Inc. (SU) with U.S.-based Exxon Mobil Corporation (XOM). The chart shows a close-up of the last two days of trading (15-minute increments), and a simple dynamic stands out. Although both stocks jumped higher when they started trading on Monday, since that time, Suncor shows a decidedly upward trend, while Exxon Mobil shows the opposite. This may reflect the belief of investors that one of these companies (and the country it is in) is better positioned than the other.
The Bottom Line
Despite a narrow range trading day ahead of tomorrow's Fed statement, longer-term risk instruments rose in price, signifying the continued nervousness inherent in the thinking of informed investors. Investors may move to bonds if the Fed announcement implies troubled market conditions ahead.
Enjoy this article? Get more by signing up for the Chart Advisor newsletter.