Buckle Up

Pick your perspective

I’m loading you up this weekend as a bunch of things are jumping out at me. First, a small but important correction. The May VIX futures contract will expire this coming Tuesday morning rather than the usual Wednesday because of the Juneteenth holiday on Friday, June 19th that moves the monthly OpEx to Thursday the 18th. Shoutout to Jeremy for the heads-up on my miscue.

Let’s start with the usual weekly recap. The large cap US equity indices were little changed on the week but that masks some day-to-day gyrations and a weak showing on Friday. The bigger red ink can be seen on the international side with some big givebacks from markets that have been outperforming the US for more than a year. It was interest rates that were blamed for Friday’s pullback as the 30-year Treasury poked above 5% for the second time this year. As we noted in Friday’s post, credit markets deserve your attention as the potential source of an equity market rug pull.

Looking at the VIX futures, the week over week change looks very benign with the front end essentially unchanged even as spot VIX moved up more than a point. Part of that is the proximate expiration of the May contract as mentioned above.

On the other hand, the VIX Mix was smashed on Friday and gave back 17 points week over week, losing the bullish condition that it had recaptured on Thursday. We also saw a big change under the hood as bullish components shrank from ten on Thursday to only two at week’s end.

We’ve been commenting recently that the VIX Mix has stalled out relative to the uptrend for the S&P 500. That shows up as the purple line of the 10-day moving average in the following chart. Contrast the recent action with the synchronized move off of the bottom at the end of March.

Another place we find something to worry about is market breadth. Here’s a picture of the NYSE McClellan Summation Index with SPX in the top pane. You can see that SPX and NYSI rose together off the bottom, but NYSI stalled out and then turned negative this past week. This may prove to be a headwind for the equity markets. We track this every day along with the same measure on the Nasdaq Composite.

On the other hand, one of our favorite volatility indicators is saying, “Don’t Worry, Be Happy.” That would be the ratio of VIXM (mid-term VIX futures) to VIXY (short-term VIX futures). As shown below, it has closely tracked SPX off the bottom and continues to look strong.

We see something similar looking at an array of the primary CBOE volatility indices. In the color scheme of this chart, purple above green above blue above red is the bullish configuration. The bottom two panes measure the VIX6M-VIX and VIX3M-VIX spreads where wider is better. All good here.

So we’ve got something for bulls and something for bears. The bears need to follow through on Friday’s weakness if they want to stop the freight train. They win if the weak breadth and lousy small cap performance show up at the large cap end. We can’t be surprised by some chop this week as the pros and cons sort themselves out. Happy to say that I’ll be operating from HQ all week and back on the usual schedule.

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