Third Time?

OK, but it could be a trap

Gotta start this weekend review with a review of how the VIX Mix has behaved since the start of the dust-up in the Middle East. Let’s begin with the fact that there were 19 trading days in February and 15 of them saw the VIX Mix bearish. And that’s before the initial strikes took place on the weekend that flipped from February to March. We were calling out the bearish divergence between a “healthy” SPX and a “sickly” VIX Mix. Once the shooting began, the Mix got as low at 5% on March 6th, then “bounced” to 12% on the 11th only to retreat to 7% on 3/13. We then “rallied” to 21% on the 17th and that turned out to be the top before sliding back down to 7% on Friday. So we might say that this is the third time the Mix has been swatted down since things turned ugly. But there’s nothing out there that suggests “third time’s a charm” here.

The weekly recap is nothing but ugly. Somehow the Russell 2K eked out a small gain and a few foreign indices also show green. No surprise that volatility ticked higher and long vol won out over short vol.

Here’s the VIX Mix and chronology. Pretty bleak.

The VIX futures term structure provides another look that has nothing bullish to say. We’ve noted for a while that spot VIX above the term structure is abnormal and risk-off while backwardation at the short end of the “curve” says the same thing. You can also see here that a bad picture on March 20th has taken a turn for the worse. Spot VIX at nearly 32 implies that the market expects daily moves (up or down) of nearly 2% per day over the next month. This is not bull market behavior.

This next chart was included in Friday’s post but is worthy of repetition. The weekly chart of the S&P 500 confirmed a bearish moving average crossover that snuck into the red last week. This is the first time we’ve seen this since last year’s Tariff Tantrum.

Could we get another bounce? Certainly. And the quarterly options expiration set for Tuesday could help fuel a liftoff. But OpEx isn’t going to resolve a conflict that has already gone on longer than expected and is threatening to put “boots on the ground” in the form of US troops, none of whom will be related to the President or members of his Cabinet.

The depth and duration of this correction have triggered mechanical selling tied to trend and volatility. Further declines will likely add to that. Should we see the equity market move higher in the coming days, a lot of smart money is positioning to fade the bounce. We’ve said it twice and we’ll say it again. There is no reason to stick your neck out right now. Check to make sure that your investment portfolio is in sync with your long-term objectives and risk tolerance. If you identify as a trader, make sure that your systems are prepared for volatility in either direction.

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