Unprecedented Vol Suppression, but signs of more upside ahead??
Going as far back as the VIX goes, there really hasn't been a period of volatility movement so tightly suppressed. The VIX has slowly been creeping up since its December bottom, but in the tiniest movements possible. No real significant spikes.
Now, I alluded last fall to there being potentially one last big rally before this market tops and we go down. This rally has certainly gone on for much longer and gone much further than I think most people anticipated. It's completely reset the timer, if you will, on this bull market.
While people are now saying this is a massive bubble that is due to be popped, the way the options market is hedging has not shown the slightest bit of fear of a large downside move, at least not so far as the VIX is showing. We would have seen at least one significant spike and a higher low setting up by now if that were the case. But we haven't.
Even my VIX/VVIX indicator, which has now set some successive higher lows has calmed down, the most recent dip showing a lower low than the previous.
Furthermore, the junk corporate bonds
HYG
have made the most bullish turn they could have from the trend that was established last fall.
Now, while it's leveled off since late December, it's remained pretty tightly range-bound much like $VIX. Also unusual.
Zooming in some more:
On the daily a couple weeks ago, it looked like some bearish divergences, but has since turned more bullish again. Almost feeling like it's ramping up to want to break out of the range it's been stuck in for months.
Zooming in on the VIX:
Potential downtrend in the highs. The fact that the most recent spikes couldn't hold above 15... Bad news for bears, it would seem.
Or, is this what 0DTE options are doing to markets? Are we just at the start of a radical new pattern we'll have to learn with volatility that might make it even more difficult to judge a major market cycle top?
Not real sure.
What I do feel is after the FOMC meeting tomorrow, it just might be another yolo
SPY
calls moment.
In some ways the market felt like it was reaching a local top--like maybe it was due to a downturn ala last August, but looking at how VIX and HYG are moving, a part of me wants to say it's still not time to stop buying dips.
On the macro side of things, CPI and such has come in a tiny bit hotter than expected. Employment remains robust. There isn't enough obvious slowing for the fed to want to cut any time soon. We're still too far above the target inflation rate.
The way the 3 year bill treasury yields are, there's no movement in fed funds rate being implied yet. Given the hotter than expected economic reports of late, Powell may well have to turn more hawkish and kick the can down the road on the possibility of rate cuts.
Here's the thing, though. The further out you can push rate cuts because the economy remains strong, that means the "smart money" still has nowhere to go but continue to plow into good stocks.
Eventually, if the economy does show significant weakening and the fed finally starts to cut, that's when "smart money" makes a mad dash to buy treasuries while the getting is good, and will likely sell some stock to do so, sending equities down. Compounding the fact that the economy might be at just the beginning of increasingly bad news, i.e. if we trigger a recession with these interest rates (which is pretty much the point of rate hikes--to slow the economy) then you get multiple compression of price and earnings. Prices continue to cascade downwards until the economy starts to look like the tide is starting to turn back to the upside.
So, with that in mind, I feel we still have at least until late this year to keep yolo'ing stocks. It's possible we have a cool-off period where some of the chip and AI-adjacent stocks that have been extra high-flying of late go down and then sideways for awhile. When that happens, look for where implied volatility in those individual stocks look suspiciously low and the price action has begun to curl up more consistently on the daily chart. Not yet extreme, but just starting to go.
That's where you yolo some way OTM calls with maybe only a month or two to expiration and wait for the fireworks.
If the macro picture does start to look more dire later this year, before we finally reach a more obvious top, expect another massive, frothy expansion of the bubble for a number of weeks before things pop.
For now, keep it simple. If you aren't seeing significant bearish divergences in VIX and HYG, keep up the dip-buying in the indices.
Also, this rally seems to be broadening while the megacap, chipmakers and AI stocks are cooling off just a little.
RSP
(equal weight S&P) and
S5TH
(S&P 500 stocks above their 200 day moving average) have broken out of the range we've been in all through 2023. RSP has just recently set new all time highs and S5TH is now at a height we haven't seen since 2021, but not yet at its ATH.
So, I'd be more inclined to buy the dip in indices and let the "overbought" megacap and chipmaker stocks trend slightly down to sideways for awhile. Leave 'em be for a bit. Their time will come to rocket up rapidly again soon enough.
Now, I alluded last fall to there being potentially one last big rally before this market tops and we go down. This rally has certainly gone on for much longer and gone much further than I think most people anticipated. It's completely reset the timer, if you will, on this bull market.
While people are now saying this is a massive bubble that is due to be popped, the way the options market is hedging has not shown the slightest bit of fear of a large downside move, at least not so far as the VIX is showing. We would have seen at least one significant spike and a higher low setting up by now if that were the case. But we haven't.
Even my VIX/VVIX indicator, which has now set some successive higher lows has calmed down, the most recent dip showing a lower low than the previous.
Furthermore, the junk corporate bonds
HYG
have made the most bullish turn they could have from the trend that was established last fall.
Now, while it's leveled off since late December, it's remained pretty tightly range-bound much like $VIX. Also unusual.
Zooming in some more:
On the daily a couple weeks ago, it looked like some bearish divergences, but has since turned more bullish again. Almost feeling like it's ramping up to want to break out of the range it's been stuck in for months.
Zooming in on the VIX:
Potential downtrend in the highs. The fact that the most recent spikes couldn't hold above 15... Bad news for bears, it would seem.
Or, is this what 0DTE options are doing to markets? Are we just at the start of a radical new pattern we'll have to learn with volatility that might make it even more difficult to judge a major market cycle top?
Not real sure.
What I do feel is after the FOMC meeting tomorrow, it just might be another yolo
SPY
calls moment. In some ways the market felt like it was reaching a local top--like maybe it was due to a downturn ala last August, but looking at how VIX and HYG are moving, a part of me wants to say it's still not time to stop buying dips.
On the macro side of things, CPI and such has come in a tiny bit hotter than expected. Employment remains robust. There isn't enough obvious slowing for the fed to want to cut any time soon. We're still too far above the target inflation rate.
The way the 3 year bill treasury yields are, there's no movement in fed funds rate being implied yet. Given the hotter than expected economic reports of late, Powell may well have to turn more hawkish and kick the can down the road on the possibility of rate cuts.
Here's the thing, though. The further out you can push rate cuts because the economy remains strong, that means the "smart money" still has nowhere to go but continue to plow into good stocks.
Eventually, if the economy does show significant weakening and the fed finally starts to cut, that's when "smart money" makes a mad dash to buy treasuries while the getting is good, and will likely sell some stock to do so, sending equities down. Compounding the fact that the economy might be at just the beginning of increasingly bad news, i.e. if we trigger a recession with these interest rates (which is pretty much the point of rate hikes--to slow the economy) then you get multiple compression of price and earnings. Prices continue to cascade downwards until the economy starts to look like the tide is starting to turn back to the upside.
So, with that in mind, I feel we still have at least until late this year to keep yolo'ing stocks. It's possible we have a cool-off period where some of the chip and AI-adjacent stocks that have been extra high-flying of late go down and then sideways for awhile. When that happens, look for where implied volatility in those individual stocks look suspiciously low and the price action has begun to curl up more consistently on the daily chart. Not yet extreme, but just starting to go.
That's where you yolo some way OTM calls with maybe only a month or two to expiration and wait for the fireworks.
If the macro picture does start to look more dire later this year, before we finally reach a more obvious top, expect another massive, frothy expansion of the bubble for a number of weeks before things pop.
For now, keep it simple. If you aren't seeing significant bearish divergences in VIX and HYG, keep up the dip-buying in the indices.
Also, this rally seems to be broadening while the megacap, chipmakers and AI stocks are cooling off just a little.
RSP
(equal weight S&P) and
S5TH
(S&P 500 stocks above their 200 day moving average) have broken out of the range we've been in all through 2023. RSP has just recently set new all time highs and S5TH is now at a height we haven't seen since 2021, but not yet at its ATH. So, I'd be more inclined to buy the dip in indices and let the "overbought" megacap and chipmaker stocks trend slightly down to sideways for awhile. Leave 'em be for a bit. Their time will come to rocket up rapidly again soon enough.