The Daily Breakdown looks what happens when both the S&P 500 and the VIX close higher on the day. Hint: It suggests some caution for traders.
Friday’s TLDR
- Sometimes markets need a break
- Traders can use the VIX as a clue
- PepsiCo tries to bottom
The Bottom Line + Daily Breakdown
On Wednesday, both the Volatility Index (better known as “the VIX”) and the S&P 500 closed higher on the day.
Remember, the VIX tends to go up when stocks are going down, even though the VIX isn’t directly correlated to the value of the S&P 500. Instead, VIX pricing is based on S&P 500 options pricing.
It’s also important to note that the VIX is a measure of expected volatility, not direct volatility.
Tap the Brakes?
This mostly applies to the active traders out there, so if that isn’t you — if you’re a long-term investor, for instance — then feel free to read along and learn, but don’t feel swayed to change your long-term course because of some short-term winds.
For context, on any given day, the S&P 500 tends to rally about 53% of the time and on any given week, it tends to rally about 57% of the time. (Thank you Ryan Detrick, an excellent analyst at Carson Group, who published these stats).
I measured from the start of 2000 through 2024, looking for days where the VIX and S&P 500 were both higher. There were 610 instances and in those cases, the S&P 500 only gained 44% of the time in the following session — about 9 percentage points below the average.
If the VIX rallied at least 2% and the S&P 500 closed higher on the day, then the winning percentage for the next one, three and five days takes an even further dip. But that’s not necessarily the most interesting point to the data.
Instead, it was that the S&P 500 averages a loss the next one, three and five days after these occasions.
Although the average loss over these periods tends to be minor — running from about 0.1% to 0.5%, depending on the criteria — it shows that the markets tend to tap the brakes during these occurrences.
The Bottom Line: If you’re an active trader, keep an eye on the VIX and the S&P 500.
If they both finish green on the day, it’s not necessarily some huge caution flag or a doom-and-gloom signal. It’s hard to argue that it’s even bearish. But the data would suggest that when this happens, markets do tend to take a breather in the short term.
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The setup — PepsiCo
It has not been a good run for PepsiCo lately. Shares are down more than 11% over the past 12 months and at the recent low, PEP was down more than 28% from the all-time high it hit in May 2023.
Could the stock be looking for a low?
Not only are shares trying to hold a key support level on the monthly chart, but they are trying to clear recent downtrend resistance as well.
At least some of PepsiCo’s recent struggles can be tied to the rise in the 10-year Treasury yield, which makes dividend stocks like PEP less attractive to investors in the short term. It’s worth noting that the stock pays a 3.7% dividend yield and has not only paid but has raised that dividend for 52 consecutive years.
While analysts only expect about 5% earnings growth in 2025, PepsiCo is trading around its lowest forward P/E ratio in the last decade. At least on a relative basis, shares appear cheap on that metric.
On a technical basis, bulls want to see shares clear recent resistance at the 21-day moving average and stay above the recent low near $141 moving forward. For the bears, they want to see resistance hold firm, potentially driving PEP lower.
Options
This is one area where options can come into play, as the risk is tied to the premium paid when buying options or option spreads.
Bulls can utilize calls or call spreads to speculate on a rebound, while bears can use puts or puts spread to speculate on more downside should support break.
For those looking to learn more about options, consider visiting the eToro Academy.
That being said, investors can be neutral on PEP and choose to do nothing with the stock. Remember, you don’t have to be involved with every stock all the time.
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.
