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#Macro: #CPI, $SPX, $COR1M $CDXHY
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- RTM: Implied Volatility Is Likely To Rise Into CPI
- RTM: Inflation Swaps Moving Higher
- RTM: We Are Not On A Path Back To 2% Inflation
- RTM: Divergences Between Stocks And Risk
- Apple/Jobs Preview
- RTM: Have The Stock Market Declines Only Just Started?
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Stocks traded mostly flat today as investors gear up for a hectic week of economic data. The PPI report will be released tomorrow, followed by the CPI report on Wednesday and retail sales on Thursday. Jay Powell will also speak tomorrow.
The one thing that is very clear today is that implied volatility levels seem too low, given where they have typically been over the past 2 CPI reports. The VIX 1-day is around 11.80, up from Friday by 3.5 points. However, the last CPI report saw the VIX 1-day climb to around 19; even in February, it was around 14. So, by that measure, I would be surprised not to see it closer to 18 or 19 by the end of the day tomorrow.
This implies that we can see some crazy moves in the market intraday as IV ramps and traders put on hedges. For example, on April 9, when the VIX 1 Day started to move quickly in the morning, it led to a pretty quick drop in the S&P 500. The IV reset after the CPI report can also give one of these “the market doesn’t care” moments or even days.
It is tough to predict how the market will respond to the CPI report, but one thing that seems clear is that the higher implied volatility climbs into the news, the more likely it is that the S&P 500 will rally following the report. So, it is not that the market doesn’t care; the mechanical forces are in charge. The higher the IV goes into the event, the more I argue that the market cares greatly.Â
The most actively traded options in the S&P 500 for Wed OPEX were all puts.
The IV for the 5,190 puts for Wednesday was up sharply today and is likely to continue to increase tomorrow.
It is probably not the smartest thing to try and do technical analysis on something like the 1-month Implied correlation index. Still, I thought it would be FUN to try, stressing the FUN, with a glaring inverse head and shoulder pattern that appears to be there. The implied correlation index was up today by around 4 points, and as we have discussed before, it isn’t typical to see the implied correlation index up and the S&P 500 up or flat on the day. Typically, the S&P 500 and implied correlation move in opposite directions.
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Strong Job Report Should Mean Higher Rates, Strong Dollar
The Market Appears To Be Broken
The CDX High Yield credit spread index rose on the day to 337. Typically, the high-yield credit spread index, the implied correlation index, and the S&P 500 earnings yield tend to move together. The blue line in the chart below shows that the S&P 500 earnings yield is separating from the others. While this signal can persist for a few days, it typically doesn’t persist for long. So, if the data supports financial conditions tightening, then at some point, equity prices will have to reflect the tightening of conditions.
Meanwhile, the USDMXN was up today, crossing a downtrend on both price and relative strength. Interestingly, the RSI made a higher low despite the USDMXN making a lower low in mid-April. That could be a reversal signal and needs to be watched. If the USDMXN starts to move back over 17, things can start to get interesting for the equity market.
-Mike
Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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