Summertime

Will the living be easy?

Tomorrow is the summer solstice - the longest day of the year in the northern hemisphere. Fitting that it will also mark the end of a three-day weekend. The song Summertime was composed by George Gershwinfor the 1935 opera (yes, opera) Porgy and Bess based on lyrics from the novel Porgy written by Dubose Heyward. The song went on to be covered by Billy Holiday, Ella Fitzgerald (with Louis Armstrong) and Sam Cooke. But none of them compare to the treatment delivered by Janis Joplin from the album Cheap Thrills with Big Brother & The Holding Company. Have a listen.

The holiday shortened week saw all green for our five US equity indices while the international side was a mixed bag. On the volatility side, it was a winning week for the short vol trade with a 20 point improvement in our composite VIX Mix.

The Mix finished the week at the upper end of the Neutral zone, picking up 17 of the week’s 20-point gain.

Each of the four days charted a yellow bar and the 10-day moving average (purple line) marched higher each day.

One look at the VIX futures term structure tells you why the short vol trade (e.g. long SVIX) was a winner last week. The shorter end of the curve dropped nicely, shadowing the drop in spot VIX as markets finished the week feeling a sense of calm.

Our favorite way to convert this into a “go, no-go” looks at the ratio of VIXM (mid-term VIX futures ETF) to VIXY (short-term VIX futures). You can see in the bottom pane below that 8/21 day exponential moving average remained bullish as SPX went through its recent fainting spell.

Will markets continue to behave as we start to lose a bit of daylight with each flip of the calendar? The vol complex shows signs of settling down a bit. Equity indices are within easy reach of all-time highs. And here’s something you may not realize - small cap stocks (Russell 2000) have outperformed the S&P 500 year-to-date. That’s a healthy move away from the small bunch of huge stocks that get all the press.

We do need to keep in mind that the shenanigans in the Middle East are far from fully resolved and there is still an inflation impulse working its way through the economy. Let’s enjoy summertime, but I’m not sure the living will be easy.

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