Another week in the books and a bunch of new highs for equity indices including SPX, QQQ, Naz Composite, MSCI EFA and Nikkei. The bulls are large and in charge. Fans of Star Trek already know that resistance is futile.
Equities are not the only place where investors are humming along to the classic Eagles song Take It to the Limit. Written by bassist Randy Meisner (with an assist from Don Henley and Glenn Frey), the plaintive ballad has been a mainstay of live performances for almost 50 years. But in keeping with the drama that has marked the band’s history, Meisner’s last performance of the song with the Eagles came a short two years after its release. Meisner’s falsetto on the song is otherworldly and not easy to reproduce night after night. His refusal to sing it one night when under the weather led to an “altercation” with Frey and Meisner was booted from the band at the end of the 1977 tour. The band continued to play the song but dropped the key so that Frey could handle the vocals. More recently, Vince Gill (who replaced Frey after he passed away) has performed the song closer in key but never as atmospheric as the original. {Music geek note: Timothy B. Schmit replaced Meisner as the Eagles bassist and has a phenomenal vocal range as heard in I Can't Tell You Why. So why didn’t Timmy sing Meisner’s song? Well, this was the second time that Schmit had replaced Randy in a band - the first being Poco - and they were buddies. Timothy basically told his Eagles bandmates that he wouldn’t sing the lead vocals on Take It to the Limit. So there!}
Sorry for the squinty chart, but it shows two important things. First, SPY is sitting in nosebleed territory as measured by where it sits against a 3 ATR channel. But looking back to the rally off the low in November 2023, we can see that it might hug that line and take it to the limit one more time.
Nothing surprising on the weekly recap. Stocks up, tiny drop in T-rates, lots of vol compression and a nice win for short volatility.
Mirroring the bullishness, the VIX Mix popped up to 80% with 15 of 17 components also bullish. Two of them have no room to go higher, but most have a chance to go up further.
This week had five green bars and finally reached above the other clusters we’ve seen coming out of the April lows.
The VIX futures term structure also cooperated with traders taking the short side, with the full complement of contracts dropping in concert with spot VIX dropping to a Friday close below 15 (for the first time since February).
The gap between the August futures contract and spot VIX is catching some attention on the Twitters. There’s good reason for that, because the spread between VX30 (constant maturity VIX futures) and spot VIX has widened out to more than 3.5 points and that puts it at the 95th percentile of forever.
Another angle on this includes a look at realized volatility for the S&P 500. We like to use 21-day RV and compare it to VIX and VX30. As shown below, RV21 has gone into the basement (5th percentile) and created a “yuge” spread to the two measures of implied volatility. Seems the folks who trade SPX options (VIX) and VIX futures are not convinced that things will remain this calm. We shall see.
Before we go, let’s go to the “Squeeze Watch” and some work we’ve done on TradingView to tweak the methodology to our liking. The details will bore most of you, so the simple summary is that we are comparing Bollinger Bandwidth to three diameters of Keltner Channel to give us a squeeze reading slightly different than the original version.
This one makes it a little easier to how tight we’ve gotten this past week.
At the risk of being really boring, a squeeze on the VIX only causes us to sit up and pay attention. It might precede a volatility eruption of some magnitude. It could also be the start of a further breakdown for VIX. The one thing we won’t be is surprised.
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.