Wall Street’s ‘Fear Gauge’ Could See More March Madness

Although Fed Chairman Jerome Powell received praise for his presser on Wednesday afternoon, in Thursday’s session market participants had changed their minds. In other words, buyers surfaced on Wednesday afternoon, on the heels of the Fed holding rates down and releasing a dotted forecast update that included a significant upward revision to its rates. 2021 gross domestic product (GDP) forecast. In fact, Powell reiterated that he expects the Fed to keep interest rates where they are in 2023, even after being asked about potential inflationary impacts of this expectation.

Thursday morning, after taking the time to digest the new forecast and the implications of Powell’s message, bond yields rose again, pushing tech stocks lower early and the rest of the market close.

In fact, the week high for the SPDR S&P 500 ETF Trust (SPY – 389.48) was $ 397.26, a site of high interest open for the series expiring last week. After the SPY fell on Thursday morning and it was clear that the 397 strike was not going to be resumed, the SPY fell to the close, possibly due to the unwinding of the long positions associated with the expiration. of the call to 397 and 400 strikes. open interest.

“…for the second time in as many weeks, the VIX peaks on Thursday and Friday failed to break out its 252-day moving average, suggesting that as we enter this week’s trading, the bulls remain below control. In fact, that long-term moving average (which equates to the VIX’s one-year average) has marked peaks of VIX peaks four of the last five times since mid-December.

For now, the scenario is that if you use the VIX for clues to the direction of stocks, be careful when this measure of volatility expectations retreats to the 20 zone, as it did in early December and mid-December. February. Additionally, look to be a buyer when the VIX climbs back to its 252-day moving average and shows signs of pulling back. But buyers are wary – if the VIX again closes above the 252-day moving average, brace for more short-term equity damage. “

Outlook for Monday Morning, March 8, 2021

After the Fed meeting and Powell’s press conference on Wednesday, the Cboe Market Volatility Index (VIX – 20.95), also known as Wall Street’s “fear gauge”, closed at its lowest level for over a year. As I observed on Twitter, the reading returned to a level that preceded equity weakness since the stock market hit its pandemic low in March 2020. At best, a period of short-term turmoil followed, and at worst noticeable short-term setbacks ensued.

As I’ve noted in the past, the VIX is more prone to pops after VIX expirations, which was the case last Wednesday. However, this was the case when open appeal interest was predominant, a scenario that had been in place for years.

Note in the chart below that for VIX futures options expiring in April, May and June, from the end of February, the open put interest has exceeded the open call interest. Such situations are rare. But historical events in the past have preceded a decline in the VIX. This time around, the VIX gained some ground on open interest, versus open interest on the call, when the VIX hit its most recent high around its 252-day moving average.

The current configuration of open interest rates on VIX futures could suggest that the VIX is on the verge of breaking through the 19-20 low in the coming weeks or months.

Meanwhile, the S&P 500 Index (SPX – 3,913.10) has continued to trade in a well-defined channel since mid-November, when the headlines on Covid-19 vaccines turned decidedly positive, confirming that ‘there was a light at the end of the tunnel for a return to normal.

In fact, the SPX tested the lower bound of this channel during the selloff that emerged late last week. If the SPX continues to trade on this channel, it would make sense for the VIX to drop below its multi-month long low.

As we enter this week’s trading, the top of this channel is in a range between 4,045 and 4,065, but resistance could also come into play at the 4,000 millennium and 4,056 level, which represents six times the 2009 closing low.

The lower limit of this channel is between 3,910 today and 3,930 at the weekend. If the SPX goes below that range, look for the 3,835-3,850 area, which is the site of an extended trendline drawn through lower highs in February. The closing level before the breakout above this trendline two weeks ago was at 3,875 and as such adds another support level before 3,835-3,850 kicks in. Coincidentally, the 40-day moving average for the SPX stands at 3,875.

SPX 40 days MMO

In fact, after the share-only buy / buy volume ratio spiked to multi-month highs, a subsequent decline in this ratio sets the stage for SPX to move up from last week’s support, as skepticism from short-term traders has peaked.

But the spike came at a relatively low level, suggesting that the market could quickly become vulnerable after only minimal advance.

MMO pc ratio

After Thursday’s trading, my volume on CNBC was on, but I was turning my back on the television. I’ve heard from many guests that the technological retreat of large caps was a buying opportunity. From this point of view only, I would advise being careful if you venture into these waters.

However, the 10-day open sell / buy volume ratio on Nasdaq-100 index constituents (NDX – 12,866.99) only peaked near its high. of November and is now recovering. Similar action in this ratio was a buy opportunity in November, so there is a bullish case based on sentiment.

ndx pc ratio MMO

If you are looking for technical clearance to enter a large cap bullish tech trade, which is advised, I think it is best to look for the resistance I discussed last week to pull it out. Specifically, and according to the chart below, look for the NDX to climb above a combination of its 40-day moving average, which marked last week’s peak. Additionally, the 13,000 and 13,037 level, which is a 50% Fibonacci retracement of recent highs and lows of closing, remain significant.

In the meantime, good luck with your parentheses. While most of you won’t get the most out of your investment in tournament games, remember that options give you the leverage you are looking for all year round. And with the VIX recently off its lowest level in months and earnings season past, options are cheap.

NDX graphics MMO

Todd Salamone is Senior Vice President of Research at Schaeffer

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