Retail investors sure tried. They bought $1.93 billion in stocks on Monday. But after a solidly higher open today, Tuesday, September 21, that saw the Standard & Poor’s 500 up 0.78% at 9:48 a.m., stocks drifted slowly lower for the rest of the day as a second day of buying on the dip failed to emerge.
Huge surge in volatility this morning. It’s as if everybody woke up and said, “Hey, you know there are risky trends in the world.” As of 12:30 p.m. New York time today, Monday, September 20, the CBOE S&P 500 Volatility Index is up 29.51% to $26.08. I think there’s more volatility ahead so today I’m going to sell the VIX November 17 Call Options with a strike price of 18 in my Volatility Portfolio and buy some more time with a purchase of the VIX December 22 Call Options with a strike price of 19.
I expect that the the financial markets will remember this week that the Federal Reserve will actually say something after its meeting on Wednesday, September 22. Even if the Fed doesn’t change policy at all, the central bank will deliver a new set of economic projections with views on inflation and GDP growth that could add volatility to an already nervous markThe CME Fed Watch Tool, which looks at prices in the Fed Funds Futures market to calculate market expectations for an interest rate move by the Federal Reserve, says there’s a 0% chance of a change in interest rates at Wednesday’s meeting. The odds for a Fed interest rate increase go up to only 1.8% at the November 3 meeting according to the CME Fed Watch. And are only 1.7% for the December 15 meeting. In other words the market is utterly convinced that the Fed will do nothing.
The CBOE S&P 500 Volatility Index (VIX) closed at 20.69 today, up another 10.7%. That took the “fear index” above the 200-day moving average at 19.98. The VIX had previously moved above the 50-day moving average at 17.86. I’d be surprised if we don’t see more market nerves driving more buying of S&P hedges to send the VIX higher next week.
I found myself humming “I scare myself” this morning as the market continued its September selling. The Dan Hicks and the Hot Licks song pretty much sums up the market action this morning. We all know that stocks go down in September so we’re sending stocks downward. And we all know that September 17 is the Big Bad Day in the month so it’s unreasonable to expect a turn in sentiment before that date. But so far, I’d note, the selling seems “orderly” with the usual candidates bucking the trend and showing up in the green. It’s when those still in the green stocks start tumbling that I’ll really start to worry.
Investors and traders are hedging their bets–a little–ahead of tomorrow morning’s speech by Federal Reserve chair Jerome Powell at the central banker’s (virtual) Jackson Hole jamboree. The worry is that Powell will says something relatively concrete about the Fed’s plans for decreasing its monthly $120 billion purchase of Treasuries and mortgage-backed assets. An end to those purchases is a prerequisite to any move by the Federal Reserve to raise interest rates. So any move on the purchase schedule would be an indicator of the Fed’s thinking about when/if to raise benchmark interest rates now at 0% to 0.25%. The odds on bet is that the Fed chair won’t say anything–something Fed chairs are very good at tomorrow–and that the Fed’s Open Market Committee won’t say anything of substance at its September 22 meeting.
I try to use big up and (especially) down days in the stock market to stress test my portfolio. One of the things I look to learn from a high volatility down days is how the hedges that I’ve put on to protect my portfolio work under big stress. So, for example, on a big day down day like July 16, when the Dow Jones Industrial Average fell 725 points, I looked to see if 1) the hedges I owned worked to reduce or better yet eliminate my downside losses, and 2) how much those hedges were costing me in opportunities for upside gains postponed.
Retail sales dropped 1.1% in July, the Commerce Department reported today, August 17. Sales of furniture, sporting goods, building materials, cars and auto parts were all down strongly in the month. Sales at non-store retailers, which include e-commerce sales, dropped 3% in July.
Today the CBOE S&P 500 Volatility Index (VIX) dropped another 2.24% to 15.70. That puts the “fear index” back in the “complacency zone” where I’ve been looking to buy Call Options on the VIX in anticipation of a bounce back to the top of the current zone at 20 on the next “bad news” day. (Whatever the bad news might be.)
On Friday, August 6, the CBOE S&P 500 Volatility Index (VIX) retreated another 6.54% to 16.15. That puts the “fear index” back in the “complacency zone” where I’ve been looking to buy Call Options on the VIX in anticipation of a bounce back to the top of the current zone at 20 on the next “bad news” day. (Whatever the bad news might be.) This trade, which is not dependent on any call about a bear market or even a market correction but rather on the simple bounce from levels of extreme compliance, recommends buy the Call Option on the VIX when it breaks below !6 and then selling the Call Option when it breaks above 20.
I’m looking for answers to two big questions that earnings from Amazon (AMZN) and Caterpillar (CAT) left us with last week. In the case of Amazon, where the company reported a slide in revenue growth after a big bump in sales due to everybody ordering everything on line during the Pandemic shutdown, the question is What is the actual sales growth trend once you remove all the plus and minuses from the Pandemic? This isn’t a question just for Amazon, of course. It’s important for figuring out the valuation of everything from Las Vegas hotel and casino play MGM Resorts International (MGM) to streaming champion Netflix (NFLX) to Starbucks (SBUX). The other question left hanging at the end of the week is whether or not we’re about to see a string of companies forecasting lower margins due to rising prices for raw materials. That was the takeaway message from Caterpillar’s (CAT) earnings report.
With the major indexes all down ahead of tech earnings–and fear up–I’m pulling out my VIX options trade again. The rule here, until modified by reality (pesky little thing) is to buy when complacency drives the “fear index” to 16 or below, and to sell when fear rises and pushed the CBOE S&P 500 Volatility Index (VIX) to 20 or so. This morning selling in the market sent the VIX up to 19.85, close enough for me to 20, and I’m selling the October 20, 2021 Call Options
