VIX rallied to challenge mid-Cycle resistance at 15.32 before closing above Intermediate-term support at 11.89. It is now on a buy signal. A breakout above mid-Cycle resistance implies that VIX may rally to its weekly Cycle Top resistance at 23.76.
The co-inventor of VIX warns that low volatility is not the new normal.
(Bloomberg) It finally happened.
After months of speculation over when the lull in U.S. equity volatility would snap, investors got their answer Wednesday. A bombshell report on President Donald Trump’s interactions with former FBI director James Comey sent the VIX up the most in almost a year.
For anyone on the wrong end of the trade, it was a painful lesson.
SPX makes a new high and a reversal
SPX made a new all-time high on Tuesday, barely 5 points higher than the March 1 top, then sold off to Intermediate-term support at 2356.28 before closing beneath its Cycle Top resistance at 2385.73. This constitutes a reversal pattern that may result in a decline beneath supports that have provided the impetus for this rally. Trading methodologies that have been helpful during the rally may actually increase the risk of a sell-off.
(Bloomberg) U.S. stocks climbed, paring more of Wednesday’s loss as investors assess the political scrutiny surrounding President Donald Trump.
The S&P 500 Index rose 0.7 percent to 2,381 at 10:15 a.m. in New York, while the Dow Jones Industrial Average added 0.5 percent to 20,762. Stocks rebounded yesterday, after a series of allegations involving Trump’s administration turned investors cautious and sent shares to their worst drop since September on Wednesday.
NDX also reverses from an all time high
NDX posted another new all-time high on Tuesday. It is clearly on an extension with earnings playing a big part of the ebullience. A decline beneath Short-term support and the trendline at 5509.14 may suggest a deeper correction is in order.
(ZeroHedge) When we were discussing the self-reinforcing dynamics of vol-neutral funds yesterday, which may or may not continue selling today depending on what the VIX does, we concluded that aside from the decision-making mechanics of systematic funds, the biggest question would be if the Fed, or other central banks, do not do step in to prop up the market as they have on every other similar occasion in the past 8 years.
Would that imply that traders – be they CTAs, risk-parity, or simply carbon-based – are finally on their own?
According to a follow up note sent overnight by Evercore ISI’s Krishn Guha, the answer is yes… at least for the first 10% of any upcoming market drop. As Guha writes, “with the US equity market sell-off intensifying Wednesday afternoon, a number of clients have asked at what point the Fed would ride to the rescue. Our answer is that this time the cavalry is not coming — at least not unless we see something much larger — at least a 5 – 10 per cent type correction and maybe not immediately even then.
High Yield Bond Index breaks down beneath Long-term support
The High Yield Bond Index declined beneath Long-term support at 163.08, the last bastion of defense against a bear market. It remains on a sell signal. The end-of-week bounce did not regain that support. The Cycles Model suggests accelerated weakness ahead that may last through the end of May.
(CNBC) Investors are getting the lowest yields on the riskiest bonds in almost three years, another sign of the high level of complacency in financial markets.
The Bank of America Merrill Lynch U.S. High Yield index is showing that so-called junk bonds are delivering yields of just 6.02 percent, down 40 percent from the more than 10 percent rate in early 2016 and at a level last seen around June 2014.
A decline in yields indicates investor demand for products at the high end of the risk scale. Demand drives prices higher and thus sends bond yields lower under the dynamics of the fixed income market. The trend comes at a time when volatility has subsided across markets, with one measure of stock market fear, the CBOE Volatility Index, hovering around historical lows.
USB rallies off supports
The Long Bond rallied from Short-term (151.76) and Intermediate-term support at 150.93, beginning the next phase of its retracement rally. USB made a Master Cycle low a week ago and is due for a period of strength over the next 2-3 weeks. The mid-Cycle resistance at 158.22 appears to be the target, but it may go higher.
