Follow The Volatility Signals

First, for every veteran, and everyone who still serves today. This November 11, we stop to honor the veterans who gave their strength, their years, and so much more in service to this country. Your service is steady ground for all of us, the kind that holds firm when everything else shifts. We never take it lightly and we thank you for your service.

1.) VOLATILITY - I'm always writing about the value of just following what the current volatility and flow signals are telling you versus trying to "predict" anything. One might ask..."What's the market going to do next?". Hint...NO ONE KNOWS! At least not with any degree of real certainty. But you can observe what the volatility and flow signals are saying right now. Yesterday...and so far this morning...VIX (S&P 500 volatility), VXN (Nasdaq volatility), OVX (Oil volatility) and oil prices fell, despite the stock indexes finishing down on the day. That tends to point to hedges coming off. Barring any new developments, when you get markets down, volatility down, it tends to suggest that the markets are trying to form a bottom. The VIX futures curve spent the last 3 days in "backwardation", where the current price of VIX is higher than both the front month and 2nd month future. That suggested that traders were betting on volatility falling. Today, the VIX futures curve is back to normal and S&P 500 futures are up about 1%.

2.) NVIDIA - When a market has already been getting crushed, another ugly headline can help bring out the remaining sellers. By now, I'm sure everyone has heard about Nvidia (NVDA) CEO Jensen Huang admitting to an affair, and the company announcing an investigation into whether he had been targeted by a foreign intelligence operation - Chinese spy. Often, with headlines like this, it can be the final catalyst for everyone who wanted out to finally get out. That’s the kind of thing you tend to see around bottoms. So, is THIS the signal we really needed to bring about a semiconductor and Nvidia bottom? That would not surprise me. And, as pointed out above, the volatility signals agree...for now. Remember, just two months ago the famous magazine cover indicator struck again. The Economist magazine showed a cover with Nvidia CEO Jensen Huang as "The Sorcerer Of Silicon". That was near all-time highs, and since then Nvidia stock is down over -25%. Nice job Economist. But, let's take a look at the Nasdaq 100 via QQQ. Last week, the Qs broke below its summer lows. Then it quickly recovered that level, and Monday brought a sharp rally. This is the type of whipsaw you can see at turning points. That QQQ signal might also be proving that Nvidia can struggle while other stocks pick up the slack. Our internal signals are also giving us a second day of a buy signal on NVDA within an oversold condition. That doesn't guarantee a lasting rally, but it doesn't hurt. Yesterday I pointed out that junk bond spreads didn't blow out on the stock "crash". That was an important signal. Now we have a possible failed breakdown in QQQ and a rally in the opposite direction. Could semiconductors rally here, put in a lower high, and eventually build a much bigger top? Absolutely. Technology and the Nasdaq could do the same thing. If those things happen, it'd likely be leading up to that Fed policy mistake I discuss below. I hate "hoping" the Fed will do the right thing. Their history of doing the right thing isn't great. We'll see.

3.) RATES - Rates can also give us a look at possible outcomes. Yesterday's inflation data was an acceleration. Food and energy came in hot. But if you exclude that, goods came in hot. But if you exclude that, shelter came in hot. But if you exclude that, the rest of core non-housing services came in hot. If you exclude that, then, well, there's nothing left. Not funny...I know. Not great news for a consumer, but not terrible for current markets either. But with data like this, does this put a DEC rate hike at a lock? Prediction markets think so with Kalshi.com signaling an 86% probability of a 0.25% rate hike in December. That may or may not happen. But I can tell you this. IF the Fed does raise rates in December, they'd be doing it into a likely slowdown in 2027. That would be a severe policy mistake and markets would likely not respond very nicely. For now, due to the volatility signals I discussed above, and the market flows we've seen, markets are still signaling "We're ok". ETF Investors definitely bought the dip. We've seen about $12 billion / day in flows over the past 5 days, and the top 17 ETFs are all equity related...not sure I've ever seen that...but those kinds of flows tend to be supportive.