Steady As We Go

Whose side are you on?

The “big” Fed meeting is now behind us without market disruption. Stocks continue their trend to new highs. Small caps are catching up. International equities are crushing the S&P 500 year-to-date. Bears are badly beaten and searching for a catalyst. It all adds up to “steady as we go” as a reasonable theme.

It would be nice to have the VIX Mix back at a bullish reading, but there is still some caution that accompanies being steady as we go. We made a little progress yesterday and could get back into the green with another good day or two.

Ten of the 17 components are on the bullish end and only two are bearish. The bull case for equities definitely needs the improvement to continue. A persistent divergence between all-time highs for SPX and neutral readings for VIX Mix would be a bad sign.

One of the indicators we pay close attention to is a derivative of the VIX futures term structure that looks at the ratio of mid-term futures (captured by the ETF $VIXM) and short-term futures (captured by $VIXY). We take the ratio and filter the daily noise with 8-day and 21-day exponential moving averages and plot crossovers. As shown below, the most recent cross was back on May 1st and that bullish condition has not wavered since then. You can see in the top pane that the 8/21 crossover on SPX came at the same time (actually a day earlier). We would not recommend this as a stand-alone trading signal, but it’s pretty useful to know if you’re in the green or the red. For the moment, it’s steady as we go.

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