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Dow Jones breaks 30,000 for the first time in history

The stock market rally is driven by a significant drop in the volatility index.

Written by Leonardo Hadi · 2 min read >
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Disclaimer

Dow Jones Industrial Average breaks above 30,000 for the first time in history after positive news on vaccine development from Pfizer and the selection of Janet Yellen, the former Federal Reserve chair, as the Treasury Secretary.

The Dow closes at 30,046.24, a rise of 454.97 points or 1.5% gain from the previous day. The record-breaking increase boosts the equity market across the sectors, including all industries heavily impacted by the coronavirus, such as energy, cruise lines, and airlines.

The shares of United, Delta, and American Airlines are up 9% today, while Carnival and Royal Caribbean are up 11.5% and 7.62%, respectively, despite the rising number of coronavirus cases and restrictions.

From the energy sector, Chevron and ExxonMobil are up to 6%. The Canadian energy stocks such as Suncor and Canadian Natural are up to nearly 5%. While, the stay-at-home stocks such as Zoom, Amazon, and Netflix stay flat today.

THIS MEANS MY INVESTMENT IN STOCK MARKET IS DOING BETTER?

The transition to a new government and the positive results on the coronavirus vaccine trials from Pfizer and Moderna has signaled that the economic recovery is underway.

The positive news gives a confidence boost to the stock market and triggers the Dow rally to break historical 30,000 points.

The volatility index measures the market confidence in the economy. Any events that cause instability and uncertainty in the market, such as pandemic and US elections, will increase the volatility index.

The rapid increase in the volatility index will trigger a sell-off in the stock market and a rally in the gold and bond markets. On the other hand, the decreasing trend in the volatility index will cause a rally in the stock market and a sell-off in the gold and treasury bond markets.

The capital transfer occurs because investors use gold and treasury bond to hedge their position them from a market downturn in a bad economic condition. The reason is that they have a negative correlation with the stock market.

The hedging is often temporary because gold and treasury bond generate lower returns compared to the stock market. When the volatility index is going down, the stock market will start to perform well. At the same time, gold and treasury bond prices will go down.

When Dow Jones breaks 30,000 points, the volatility index declines significantly to 21.64 points from 40.28 points during the US presidential election and 82.69 points from the pandemic’s height in March 2020.

The gold price has dropped 12% in the last four months, from $2069/oz to $1807/oz. The 10 years treasury bond yield increases from 0.5% to 0.8% for the same period. The price of the bond decreases as the yield increases.

The positive macroeconomic news such as inflation, unemployment, monetary and fiscal policies also cause the stock market to rally.

Is my investment in the stock market is doing better than the gold and treasury bond markets?

The short answer is YES because the volatility index is trending down, followed by positive macroeconomic news. However, the stock market can move in the opposite direction if uncertainty and instability occur again in the economy, and macroeconomic reports bad news.

The volatility index is the key “lead” measure for the Long/Short Macro strategy in the quantitative hedge fund. The Long/Short Quant Fund will go short in the stock market and go long in the gold and treasury bond market when the volatility index is high, and vice versa.

Therefore, it is more important to monitor the volatility index trend than the stock market price movement because the volatility index is the signal on which market will do better and which market will do poorly at any given economic conditions.

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Written by Leonardo Hadi
MBA from the University of Illinois at Urbana-Champaign. Quantitative Fund Investor. Professional Engineer. Operations Professional. Profile

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