Three numbers caught my eye today as indications of where the financial markets are headed in the short term. I’m looking at the moves in the Russell 2000 small-cap index. In the CBOE S&P 500 Volatility Index ( VIX). And in the odds on interest rate increases from the Federal Reserve on the CME FedWatch tool.
I expect more posturing, more attempts to extract leverage, and more blaming–but, in my opinion, no debt ceiling deal this week. The big question: “When does the stock market start to take the possibility seriously–unthinkable as it might be–that the United States could default on its debt.
Today’s topic is Lots of Volatility – But It’s Not Tradeable. The market has not been responding as expected to recent events. On Friday, May 5, a combination of a chaotic market, a banking crisis, and job numbers that were much higher than expected, resulted in a completely unexpected market reaction. On previous behavior, these higher job numbers would have led to a conclusion that the Fed would continue to raise rates. Stocks would have tumbled. But Friday this time, we got a big rally in the news in the report. The market is vacillating between belief in a recession with banks failing, and belief in a strong job market where the Fed continues to raise rates. That’s created a scenario of wild swings, driven more, I’d argue, by where prices have been recently than by any trend in the news. You can see this in the VIX. The “fear index” rise as banks struggled but the jobs report said that it was alright to bid bank stocks (and the market in general) higher on the day even if the regional banking crisis is a long way from over. I’d prefer to trade volatility when “all” it requires is getting the direction of the news correct. Bu,t the current market requires getting both the trend in th news and the markrt’s reaction to that trend right in order to make a profit. That’s harder than I’d like and it seems prudent to wait for more predictable (and tradeable) volatility.
The next potential BIG volatility day comes on Tuesday, May 9, when President Joe Biden is scheduled to meet with Speaker of the House Kevin McCarthy will hold talks on raising the debt ceiling to avert a U.S. default. I don’t expect a breakthrough of any dimension. The politics say to me that both sides are dug in and that we’re still too far away–weeks perhaps–from the excrement hitting the propellers. The question for investors and traders is when the financial markets might start taking the prospects of a U.S. default seriously.
Immediately after the Federal Reserve’s decision to raise interest rates another 25 basis points today, stocks moved up on a reading of the Fed’s 2 p.m. statement released with the rate news that saw the Fed as saying it would begin to cut interest rates soon. At 2:26 p.m. New York time the Standard & Poor’s 500 was up 0.58%. In Wednesday’s statement, the Fed said, “In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” In March, the central bank had said it “anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” But stocks peaked for the day shortly after Fed chair Jerome Powell began his press conference at 2:30 p.m.
Thank goodness the banking crisis is over. (Where’s that sarcasm emoji when you need it?) Today, shares of Western Alliance Bancorporation (WAL) closed up 24.12% after the bank reported that deposits hadn’t fled the bank in the first quarter as rapidly as was feared. Signature Bank (SBNY), which is being shut down by regulators rallied a huge 26.01%. Granted that was from a share price of just 16.5 cents a share. Excuse me when I remember that the stock traded at $143.17 on February 2. The SPDR S&P Banking ETF (KBE) closed up 3.07% on the day. The regional bank ETF, SPDR S&P Regional Banking ETF (KRE) closed p 3.94%
The VIX “fear index,” known more formally as the CBOE S&P 500 Volatility Index (VIX), dropped again today with a retreat of 3.60% taking the index down to a close of 17.16. The VIX, which measures the price that investors and traders are willing to pay in the options market to hedge risk on the Standard & Poor’s 500 in the next month or so, hasn’t been this low in 2022. The prior low for the VIX this year was 17.87 on February 2. You have to go back to December 27, 2021, when the index stood at 17.22 to find a roughly comparable level. With all that lurking out there in the financial world, I find the VIX at 17.16 too good to pass up.
Today March 29, the VIX dropped again, losing another 4.01% to 19.10. So I’ll be buying the June 21 Call Option with a strike price of 23 tomorrow. A contract for 100 shares closed at $305 today. This buy will go into my Volatility Portfolio.
Today’s topic is: Complacency is Rising – Again. I’ve been following the VIX closely throughout the recent market turmoil. The VIX is often called the “Fear Index” as it measures how much people are willing to hedge against the S&P. As you can imagine, the VIX shot up with the recent bank scare but has been coming back down again recently. The market has decided very quickly that the banking crisis is no longer a problem and they just aren’t all that worried. Similarly, the ICE Bank of America Merrill Lynch MOVE Index (^MOVE), considered the “VIX of the bond market,” showed a big jump during the Silicon Valley Bank and Credit Suisse problems, but has quickly started to come back down. These are two areas where I would buy a call option if they get low enough. I will not buy puts on these because I don’t think this volatility is over. Go to JubakAM.com to follow my volatility and options portfolios.
On March 6, I bought the May 17 Call Options with a strike of 23 on the CBOE S&P 500 Volatility Index (the VIX) when the index traded at 18.61. I figured that the “Fear Index” was so low that it wouldn’t take much to push it and these options higher. A week later the options were up 116% after the VIX climbed to 26.52. Historically, that isn’t a very high reading for the VIX, which can easily hit 35 to 45 when fear engulfs the market. I’m still holding my June 21 Call Options with a strike of $23. But I’ve been looking for a chance to replay that earlier trade. Somehow (LOL) I don’t think this market is done with volatility.
This week’s Trend of the Week: There is no Trend. When I was filming this video on Tuesday the 14th, the S&P was up almost 2%, the DOW was up almost 1.5%, the NASDAQ was up 2.23% and the VIX, which had been climbing higher with the Silicon Valley Bank collapse, was down almost 15%. Since filming, the markets dipped sharply with the threat of Credit Suisse going under, and have trended slightly upward since. If you’re going to trade in this market, you have to do one of two things. One thing is to be very fast, and trade on the bounces as they show up. The other tactic is planning ahead. Long-term in this market is about a week. A week prior to filming (3/6) I bought Call Options on the VIX (the volatility index) and I sold them on March 13 with a 108% return. On March 14, however, those VIX Call options were down 27%. Talk about volatility! The trend is, there is no trend. Subscribe to my JubakPicks.com to get timely posts on how to keep up with the chaos. For more options and other volatility plays, subscribe to JubakAM.com.
Shares of Credit Suisse (CS) fell this morning–if a 31% drop at the worst moment can be called “falling”–after the bank’s biggest shareholder said it would NOT put more money into the challenged bank. As of noon New York time, shares of Credit Suisse were down 24.1%. The bank’s bonds fell to levels that signal deep financial distress, with securities due in 2026 dropping 17.75 cents to 70 cents on the dollar in New York. That puts their yield at about 20 percentage points above U.S. Treasuries.
