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Volatility Indexes Are Sending A Strange Message As High Yield Melts

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

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November 1, 2021

Stocks – SBUX, PYPL

Macro – VIX, VXN, IRON ORE, SHIPPING, HYG

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Stocks finished the day higher, with the S&P 500 gaining 18 bps. Not much was accomplished between Friday and today, so from my standpoint, that leaves a lot of the technical views I have shared relatively unchanged and not worth diving into. Given the Fed meeting on Wednesday, it seems likely we will grind sideways until that meeting.

VIX

The VIX did rise slightly today to 16.4, and it has been trending higher the past few trading sessions. It isn’t normal to see the VIX and the S&P 500 both trending higher simultaneously.

VXN

The VXN is also moving higher as well, and again this is highly unusual activity. Typically, when I have seen this rise in volatility and an increase in the market, it leads to a pullback; think about September 2020. It doesn’t have to lead to a drop; I guess it could even lead to a push higher if the volatility melts.

It would make sense to see the VIX and VXN rise heading into the Fed meeting. But still worrisome.

High Yield (HYG)

There is a massive divergence forming between the HYG ETF and the S&P 500. These two tend to trade together, so a deviation of this size seems notable. It doesn’t tell us which asset class is correct, but couple that with rising volatility, and one should be paying close attention.

Starbucks (SBUX)

Starbucks rebounded sharply today after falling on Friday. Friday’s gap is still open and will likely get filled at $113.50 before the stock resumes its move lower.

PayPal (PYPL)

The chart for PayPal doesn’t look encouraging heading into results later this week. I have seen some options activity in the name, but I need to go through and analyze it better; I just haven’t had the chance. But the stock is sitting right on support at $230, and it won’t take much of a push at this point to get the shares trading down to $213.

China

Iron ore and shipping prices keep dropping, and the manufacturing slowdown in China for two months seems to be going ultimately unnoticed by the market. At some point, everyone will see it, but so far, no luck. I wonder how much longer the market will continue to rise in front of a global slowdown as the Fed reduce its asset purchases. ¯\_(ツ)_/¯

-Mike

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