Less Happy

Should we be worried?

Our most recent invocation of Bobby McFerrin’s “Don’t Worry, Be Happy” was the morning of June 5th referring to the prior day’s close. As shown on this chart of the S&P 500, June 5th was the start of a period that is distinctly less happy and therefore more worrisome. That includes a rather ugly drop in the equity futures as we approach the open this morning (June 23rd for clear reference).

June 4th was also the last time we saw a bullish reading on the VIX Mix and June 5th produced a very ugly drop of 49 points in one day. Gauge readings have improved since then, but have not returned to the bullish end of the scale.

In fact, yesterday saw a drop in the VIX Mix from the low 60’s back down to 53%. 11 of 17 components are in neutral with only four bullish while two finished in the red.

This premarket snapshot of VIX and the VIX futures has a familiar look to it. Spot VIX is up almost three points from yesterday’s close and has jumped above the front month July futures contract. Spot north of the futures is never a good look but we saw it on June 5th and again on June 10th. But so far, these moves have not caused the futures term structure to lose contango (upward slope from left to right). You should lift an eyebrow when this happens and pay closer attention to the day-by-day.

No surprise that today’s premarket ugliness is coming from the tech sector both in the US (Micron down 9%) and around the world (Korean KOSPI down 10%). Dow futures not nearly as ugly as SPX and Naz. It’s clear that the strong uptrend from the late March bottom has been disrupted. Big money has been taking profits from winning positions. A deal for peace in the Middle East remains uncertain. Some people are nervous about what Kevin Warsh has in store as the new Fed Chairman. All we know is that volatility has returned and that makes it a good time to check your risk tolerance and make adjustments as necessary.

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