Monday, November 28, 2022

Morning Note: VIX Approaching Interesting Territory

As I stressed in Friday's video (worth watching), while we're open to the notion that a new bull market is in the near-term offing, it's still not our base case, per the general conditions backdrop and the technical indicators I continue to illustrate.

Another interesting setup I've been eyeballing as I work through my weekly exercises is the relationship between the VIX (tracks the pricing of implied volatility in SP500 options contracts) and SP500 price action itself.

The green line in the top panel below is the VIX's spot price, the rest are 1-month to 8-month VIX futures prices. The bottom panel is the SP500's price action over the past year:

I.e., we're approaching some interesting, and perhaps precarious, territory...  

Stay tuned...

Asian equities were red overnight, with 13 of the 16 markets we track closing lower.

Europe's suffering as well so far this morning, with 15 of the 19 bourses we follow trading down as I type.

US stocks are down to start the session: Dow by 179 points (0.52%), SP500 down 0.72%, SP500 Equal Weight down 0.80%, Nasdaq 100 down 0.71%, Nasdaq Comp down 0.74%, Russell 2000 down 0.80%.

The VIX sits at 21.96, up 7.12%.

Oil futures are down 0.81%, gold's down 0.35%, silver's down 1.41%, copper futures are down 0.64% and the ag complex (DBA) is down 0.70%.

The 10-year treasury is up (yield down) and the dollar is up 0.01%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 6 -- Vietnam equities, Mexico Equities, Amazon, our emerging mkts ETF, long and intermediate-term treasury bonds -- are in the green so far this morning. The losers are being led lower by Dutch Bros, Albemarle, Apple, Disney and energy stocks.

"...the more energy you put into trying to control your ideas and what you think about, the more your ideas end up controlling you."

--Taleb, Nassim Nicholas. Antifragile

Have a great day!


  1. Thanks Marty! Vix is indeed very interesting. The market overreacted with the turmoil in China even though China doesn't directly affect the US equity market.
    This is a very interesting week with Fed Powell speaking on Wednesday 11/30/22. The Non-Farm Payroll report is coming out on Friday 12/2/2022. I think the market is looking for a higher unemployment number compared to the previous month. I don't think the market will see that because of the all the seasonal hires for retails and freight companies. But you never know since Tech Companies just went through massive layoffs.
    Consumer credit spending is a major concern with an estimated of $Trillion in debts.

    1. You bet Sam!

      Ironically, Chinese stocks actually rallied today, and continue to in the Asian session this evening. Rumors (just rumors at this point) indeed suggest that the protests have inspired Beijing to abandon covid-zero sooner than later (or at least speed up the exit plan)... A couple of credible Chinese commentators I follow suggested today that the story line from the top will be that the latest variant is less lethal and therefore allows for more rapid reopening...

      Here are a couple of Bloomberg highlights this evening:
      "Some concessions have quietly emerged. People who stay home don’t need frequent Covid tests, the state news agency said on Tuesday, a retrenchment from the previous reliance on mass testing to track the virus. The elderly and students taking online classes were exempted from daily tests in Guangzhou. Movement restrictions imposed in Beijing to trace the source of Covid or identify those infected generally must not exceed 24 hours, officials said."

      "The Hang Seng China Enterprises Index erased Monday’s drop, led by property developers, after the government eased some financing restrictions for the industry. Stocks associated with economic reopening also climbed as some investors speculated the protests may hasten a shift away from Covid Zero policies."
      With regard to China's impact on the US equity market, keep in mind the large market China (our largest individual country trading partner) is for US exporters, last year to the tune of $150 billion... Plus, as you know, China still fills an important role in the supply chain for many large US companies... So, Chinese economic disruptions can impact a not-small number of publicly traded US exporters.

      With regard to today's action, a couple of Fedheads spoke about their feeling that, essentially, the market is underestimating how ultimately high they'll be taking interest rates before they pause... With Powell up on Wednesday I'm wondering if the market isn't sniffing out potential disappointment from him.

      Yes, the jobs data will be interesting!

    2. Thanks for this great explanation! Morgan Stanley sees early Fed pause among 2023 expectations. I think that is very likely because of UK financial turmoil, tremendous housing slowdown, and fear of something might break. 50 basis point for December is very likely. I think they will then slow down with the rate hikes to see more data coming in for inflation. First quarter of each year, around January and February, things are pretty much very slow. Inflation in my guess will roll over hard in the February lagging CPI indicator.
      I saw an interview of Marko Papic on Bloomberg. He made a very good point that it is not a good comparison to compare current market to the '80. Instead, he said that we should look at the mid-'40 to early '50 where the US had high inflation coming out of WWII. Papic makes a lot of sense in terms of that perspective.

    3. Good stuff Sam! And think Papic's reading our blog:
      "From an overall macro perspective, however, we consider the 1940s -- which was the last time the US was saddled with over 100% government debt to GDP, with large amounts of debt in need of refinancing coming due, alongside the reality that government was set to run massive budget deficits as far as the eye can see -- to be perhaps history's best analogue for what's happening today... Which, by the way, is in sharp contrast to the dynamics that Fed Chair Paul Volcker and company faced back in the early 80s... I.e., they didn't have the debt sword of Damocles hanging over their heads, as does the Fed of 2022, and they were in fact just entering a resoundingly capital-friendly (disinflationary) era -- as opposed to exiting one (it), which characterizes the present go-forward setup...

      Therefore, our point remains that, tough talk aside, J. Powell and company -- considering the current debt setup -- simply cannot attack inflation the way the Fed of the early 80s was able to... Clearly, they're already getting spooked by the prospects of seriously breaking something as they tighten the screws on the economy."
      Just kidding, I'm sure he doesn't, it's just coincidental that we agree on our preferred (1940s) analog... The guy has been a real resource for me in terms of how to think about geopolitics!