Devil Be Gone!

But sleep with one eye open

I’ve been keeping track of Susan Tedeschi for more than twenty years. Pretty sure the first time I heard her voice was on Fordham University’s radio station, WFUV, that was a great source of artists not yet in the mainstream along with journeymen like Chris Smither and John Hammond. Susan took it all to a new level when she teamed up with (and eventually married) guitar prodigy, Derek Trucks. Susan’s voice is every bit as distinctive as Derek’s signature slide guitar.

For today, we’re listening to Devil Be Gone from their most recent album, Future Soul. Last Friday was one of those lightning strikes that leaves you wondering just how black the following Monday will be. Answer: Not very dark at all. But it was more like opposite day than anything else. Friday was a tech-focused sell off with defensive sectors staying green. Yesterday was just the opposite, as shown below.

Meanwhile, the epic damage done to the VIX Mix remained largely intact with our gauge barely able to reach the edge of the neutral zone. And while the bearish count of components dropped from 12 to 9, the two bullish numbers from Friday both dropped into neutral.

Looking at our chart of the trailing 12 months, there is a lot of damage to be repaired. What was looking solidly bullish through Thursday’s close now looks like a pretty deep hole that the market needs to crawl out from.

However! As we pointed out over the weekend, the VIX futures term structure was still in decent shape on Friday and got a bit better in yesterday’s action. It seems clear from the chart below that spot VIX had overreacted on Friday and was largely ignored by the futures. As my friend Michael Listman (UVXYTrader) pointed out on X yesterday, the futures prices are determined by real trading while spot VIX is derived from option prices that can get wacky in times of stress. The green lines are more what we would expect. And the futures held good contango even on Friday.

That contango is also reflected in one of our other favorite charts: the ratio of VIXM (medium-term VIX futures) to VIXY (short-term VIX futures). Once again, these are ETFs with price determined by how the underlying futures are being priced in the market. Short version - green in the bottom two panes represents a tailwind that supports being short volatility.

With equity futures looking good this morning, it appears that the devil has been chased away again. But there was some damage done and Satan can return any time. With a new Fed Chair in place and ongoing concerns about inflation, we will be paying close attention to rates and credit markets for signs of trouble that could easily spread into equity markets and lead to the next big volatility event.

All content presented here is for informational and educational purposes only. Distribution of any content to any persons other than the recipient is unauthorized. Furthermore, any alteration of content presented here is prohibited. By accepting delivery of this presentation, the reader agrees to the foregoing. Certain information presented herein has been obtained from third-party sources considered to be reliable, but there is no guarantee of completeness or accuracy and it should not be relied upon as such. There is no obligation to update or correct any information presented. Readers should not treat any statement, opinion or viewpoint expressed herein as a solicitation or recommendation to buy or sell any security or follow any investment strategy. This material does not consider the investment objectives, financial situation, or needs of any particular reader. Readers should seek advice from a qualified financial or investment advisor prior to making any investment decision.