Uncommited

On the one hand....

Markets are sometimes just confusing. Signals are a mixed bag of bullish and bearish and neutral. This is one of those times from my perspective. Let’s get into it.

Our composite reading of markets through the lens of the volatility complex sits at a neutral reading of 58%. Four of the 17 components are bullish while only one is bearish. That means we have 12 that are uncommitted.

After seeing three clusters of bullish readings during the rip-roaring rally starting early April, the VIX Mix faded relative to the S&P 500. What’s happening in the yellow box departed from the trend represented by the green arrow.

On the other hand, if we isolate VOLI (at-the-money implied volatility) and TDEX (the cost of protection three standard deviations out of the money), they have clearly declined very much in sync with the uptrend of the S&P 500.

All good, right? Maybe. Maybe not. This next chart inverts the VIX so that it mirrors SPX in the top pane. Three green arrows mark the bottom for SPX. What the middle pane shows is that VIX then dropped in sync with the rise for SPX - but only for the first couple of weeks. More recently, VIX has been moving sideways. As we’ve noted before, some of this is hedging and some of this is call buying that can also keep VIX from dropping.

That sideways move in the VIX has created the “squeeze” condition that we’ve also noted and continue to monitor. At the right edge of this chart, you can see just how narrow the range has become. This “quiet” period can run for an extended period but we can’t be surprised if we get a sharp move to the upside at some point.

Here’s the bottom line for me. If VIX continues to travel in this narrow range, then I’ll be looking for an opportunity to play a vol spike. There are simply too many big picture worries that can’t be ignored: Middle East, inflation, interest rates, etc. Maybe we manage to thread the needle on everything. So maintain broad exposure to risk assets. But as my friend David Dredge would implore, make sure you have good brakes on your car so that you can drive fast but still be able to navigate the twists and turns.

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