Dow Theory Update (Bearish)

What’s in Today’s Report:

  • Dow Theory Update (Bearish)
  • VIX Analysis Update

Futures are moderately higher following positive China COVID news.

Chinese authorities said they hoped to end all lockdowns in Shanghai by May 20th as cases continue to fall.  If the Chinese economy can fully reopen in the coming weeks that will remove a big headwind from stocks.

Economically, EU Industrial Production wasn’t as bad as feared, as IP fell –1.8% vs. (E) -2.0%.

Today the focus will be on the inflation expectations contained in the Consumer Sentiment (E: 63.7) report and if five-year inflation expectations can decline from 3%, that will be another anecdotal signal that inflation pressures have likely peaked (and it should add incrementally to this morning’s rally).     We also get two Fed speakers, Kashkari (11:00 a.m. ET) and Mester (12:00 p.m. ET), but we don’t expect them to move markets (look for them to reiterate the current Fed mantra of two more 50 bps hikes).

Why Are the VIX and S&P 500 Possibly Diverging?

What’s in Today’s Report:

  • Why Are the VIX and S&P 500 Possibly Diverging?
  • Is Selling Becoming Mechanical?
  • CPI Takeaways (It Won’t Make the Fed More Hawkish)

Futures are moderately lower mostly on momentum from Wednesday’s afternoon selloff.

Economically, UK economic data disappointed (GDP and Industrial Production both missed estimates) while BOE officials warned of more rate hikes reminding markets there’s a real stagflation threat in the UK.

Geo-politically, Finland formally applied to join NATO (and Sweden is expected to follow), keeping NATO/Russia tensions high for the foreseeable future (meaning quarters and years).

Today, we get Jobless Claims (E: 190K) and PPI (0.5% m/m, 10.7% y/y) and one Fed speaker, Daly (4:00 p.m. ET), but barring a big spike in claims, a big move in PPI or incrementally hawkish commentary from Daly (all of which are unlikely) these events won’t move markets.  So, short-term technical will continue to be the main driver of stocks, and markets need to show some stabilization, otherwise, the declines themselves will invite more selling.

Are Rate Hikes a Reason to Reduce Stock Exposure?

What’s in Today’s Report:

  • Are Rate Hikes a Reason to Reduce Stock Exposure?
  • Chart: Level to Watch in the VIX

U.S. stock futures are tracking global equity markets higher amid easing Omicron fears and good economic data.

GlaxoSmithKline reported overnight that their antibody treatment is effective against the heavily mutated Omicron variant which is helping further ease fears about the new strain.

Economically, Chinese Imports rose 31.7% vs. (E) 21.5% y/y and Exports rose 22.0% vs. (E) 20.3% y/y in November pointing to a still-healthy economic recovery and that is supporting risk on money flows this morning.

Today, there are two lesser followed economic reports due out: International Trade in Goods and Services (E: -$66.8B), Productivity and Costs (E: -4.9%, 8.3%) but neither is likely to materially move markets while there are no Fed officials speaking today.

There is a 3-year Treasury Note auction at 1:00 p.m. ET that could impact yields and the broader curve and if we see a sharp enough flattening move (weak demand for shorter maturities amid rate hike fears) stocks could come under pressure, but to be clear, the tone is very risk on this morning as dip-buyers step into the market, chasing this bounce higher.

Why Did Stocks Drop Again?

What’s in Today’s Report:

  • Why Did Stocks Drop Again?
  • The VIX Has Approached a Tipping Point

U.S. equity futures are trading higher this morning as upbeat economic data is helping offset renewed fears about COVID-19 lockdowns and the global economic recovery.

PMI Composite Flash data was better than expected overnight, especially in the EU (52.5 vs. E: 49.1) where economic lockdown concerns have weighed heavily on stocks this week.

Looking into today’s session, there are two economic releases that will be in focus early: Durable Goods Orders (E: 0.9%) and the PMI Composite Flash (E: 59.0), and it is important that we see more positive trends in the data or concerns about a slowing recovery could become a stronger headwind on risk assets in the near term.

From there, focus will shift to this week’s busy Fed circuit with several more central bank officials speaking today: Barkin (8:50 a.m. ET), Powell (10:00 a.m. ET), Williams (1:35 p.m. ET), and Daly (3:00 p.m. ET). Powell and Yellen’s continued testimony before Congress today will be the most important for stocks as investors look for further reiteration of easy policy measures for the foreseeable future.

Finally, there is a 5-Yr Treasury Note Auction at 1:00 p.m. ET and as we saw last month, a surprise outcome can shake bond markets which ultimately tends to reverberate through to equities.

Bottom line, as long as there are no surprises in the auction or in the morning economic data, and policy makers stick to their accommodative message, volatility should begin to ease, but all of the possible catalysts listed above have the potential to weigh on stocks and other risk assets today.

Jobs Day

What’s in Today’s Report:

  • Why Did Stocks Drop Yesterday?
  • How the VIX and Stocks Rose Together in August

Futures are seeing a marginal oversold bounce after Thursday’s big sell off, as newswires were quiet overnight.

Economic data again disappointed, as German Manufacturers’ Orders rose 2.8% vs. (E) 6.2%, while the UK Construction PMI fell to 54.6 vs. (E) 58.5.

Both reports, combined with other lack luster data this week, are limiting the size of the bounce this morning.

Today the focus will be on the Employment Situation Report and the expectations are as follows:  Jobs Adds: 1.413M, UE Rate: 9.9%.  As mentioned, the “best” outcome for this report is a strong number towards 2 MM job adds, but not so strong that it relieves pressure on Congress to pass a stimulus bill.  A very soft number (less than 1MM job adds) likely adds to yesterday’s downside.

Another VIX-Driven Air Pocket?

What’s in Today’s Report:

  • The Latest in the Trade Drama
  • Is this the Start of Another VIX-Driven Air Pocket?

U.S. stock futures are decidedly in the red again this morning tracking Chinese shares lower as trade tensions continue to dominate global markets.

There were however, no notable trade developments overnight.

Economically, Chinese Imports rose 4.0% vs. (E) -0.4% while German Industrial Production rose 0.5% vs. (E) -0.5%, both of which were incremental, macro positives.

Today, there are no economic reports due to be released but the Fed’s Brainard speaks at 8:30 a.m. ET, and the EIA will release weekly inventory data at 10:30 a.m. ET which could move energy markets and, in turn, influence stocks.

Additionally, there is a 10 Yr. T-Note auction at 1:00 p.m. ET and if high demand pressures yields to new lows for the week, expect that to become another headwind on stocks.

Volatility—What Goes Down Must Come Up, But It Can Take a Long Time!, May 10, 2017

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Historically low volatility is becoming a bigger topic in the markets these days, and while earlier in the year low volatility was referenced with more of an observational tone, recently I’ve been hearing the bears touting low volatility as something that simply must revert soon, and as such we should be cautious on markets.

VIX volatility - What goes up must come downI don’t have a crystal ball, so I don’t know when normal volatility will return. However, I do want to spend a few moments pushing back on the idea that low volatility by itself means a correction is coming (obviously volatility will return, but as usual the key question is “when,” and ultra-low volatility doesn’t always mean it’ll return to normal levels soon).

First, you’re not seeing things. Volatility is at multi-decade lows, and that can be seen in multiple ways. First, the VIX hit a 23-year low yesterday, falling to the lowest level since 1993.

Second, so far in 2017 the S&P 500 has moved more than 1% on just three separate days, all of which were in March. By this time of year we’ve normally had 19 days where the S&P 500 has moved more than 1%.

Third, with a close at 9.98 yesterday, the VIX now is lower than nearly 99.5% of all the closes since Jan. 1, 1990. Put another way, it’s only closed this low about 0.05% of the time during the last 27-plus years. So, the VIX is extraordinarily low.

But, that doesn’t mean it’s going to bounce back soon.

First, According to a note from ConvergeEx, the all-time low for the VIX 50-day moving average is 10.8, which it hit in Feb. 2007. Right now, the 50-day moving average for the VIX is 12.17.

Takeaway: It’s very unlikely that the VIX will stay at these ultra-low levels for very long, but that doesn’t mean a big rally is looming. It would take several more weeks of VIX at these levels to drag the 50-day MA down towards the all-time lows.

Second, looking at the VIX to measure volatility can cre-ate a bit of an odd picture, because again the VIX is based on options prices and not the actual price move-ments of the S&P 500. Looking at actual stock price movement, it confirms what our eyes tell us.

Going back to the 1950s, the current volatility of stock prices is 48% of its longer-term average. That’s really low. And, this period of historically low volatility has been going on for 78 days (including yesterday). But, that doesn’t mean it necessarily will bounce back.

First, there have been two specific periods of similarly low volatility in the last 20 years. First in mid-2014 (75 days) and second from Nov. ’06 to March ’07 (79 days).

Second, we’re not even close to the record for low volatility. In 1992/1993 and 1995/1996 we saw respective periods of ultra-low volatility last for 179 and 254 days, respectively. That’s double and triple what we’ve seen so far in 2017.

The Sevens Report helps you cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves.