Stock Market Forecast – The VIX Tumbles to 4-month Lows Buoying Stock Prices

US stocks surged on Friday, allowing the S&P 500 index to close up on the week. The Nasdaq was the best performer rising 0.91% on Friday while the Dow Industrial average rose 0.7%. Nearly all S&P 500 sectors were higher on Friday, with consumer staples bucking the trend. News that Kraft-Heinz received an SEC subpoena, and cut their dividend weighed heavily on the consumer staple sector. Stocks were led higher by technology shares which increased by 1.3%.

Technology shares rose for 9-straight weeks the best start to the year in a decade. The biggest winner in the technology space was Intuit which rose 6.77% followed by Western Digital which increased by 4.9%. The rise in stocks weighed on implied volatility. US yields were nearly unchanged for the week, hovering near the 2.66% level. The stability of US yields is providing the backdrop for rising stock prices.

Kraft Heinz Tumbles

Shares of Kraft Heinz, a food and consumer staples giant dropped 27% on Friday. The stock decline to the lowest close since the current company was created in 2015. The company announced that it would cut its dividend to sure up its capital. It also announced write-downs. Kraft Heinz also disclosed an investigation by federal securities regulators. The company said it took a $15.4 billion write-down on the value of its Kraft and Oscar Mayer brands, citing significant pressure on their value.

The news was the impetus for several analysts to cut their price targets on Kraft Heinz. Kraft Heinz also revealed on Thursday that the Securities and Exchange Commission is investigating its accounting practices. Kraft Heinz had concluded an internal investigation into the matter which generated a $25 million charge in the quarter. The company said it was cooperating with the SEC and the charge isn’t material to earnings. Berkshire Hathaway, Warren Buffets company, dropped 1.7% on Friday. Berkshire is the largest holder of Kraft Heinz stock. The decline in Berkshire somewhat weighed on the financial sector.

The VIX Continues to Tumble

Implied volatility continues to decline as the S&P 500 rose. The VIX dropped 6.4% on Friday and 9.4% for the week. The VIX measures the implied volatility of the “at the money” strike prices of the S&P 500 index. The VIX has declined to the lowest levels seen since September of 2018. When the VIX drops complacency begins to set in. The VIX is seen as a fear gauge and rose as high as 30% in December. The current reading of 13.5% means that traders believe that prices of the S&P 500 index will rise or fall by 13.5% from current levels. This represents a good time opportunity to hedge a portfolio. If you are long stocks and want to mitigate your exposure purchasing puts are relatively inexpensive.