Is The Market Hedged Heading Into Earnings Season?
1.) EARNINGS - Earnings season will be in full swing through the end of this month with about 12% of the S&P 500 reporting this week and 38% reporting next week. So, time for companies to lay their cards down. There's been some turbulence under the surface, which can be seen in how VIX has been acting recently. Over the past week, we've seen VIX go from 15ish to over 22. That's some fear taking hold as traders buy protection. But again, what happens when that protection is unwound? Right...they buy futures. Based on implied volatility, it would appear that there is a decent hedge under the market with the S&P 500 showing a 78% implied volatility premium. That suggests hedging is healthy, which is pretty normal headed into earnings season.
2.) CHANGE - Could we be seeing the "sweet spot" for seasonality and the mid-term Presidential cycle starting to shift? Possibly. I wrote about this seasonal phenomenon yesterday. You can read that here if you want. A change in trend has to start somewhere and based on simple price metrics, we could be at the start of some change that, right now, looks more positive than not. Maybe it's earnings that create the catalyst for the next leg up, which would coincide with the whole positive mid-term cycle.
3.) RATES - Bond yield across the curve are still signaling bullish trend, or an upward bias. That said, the 2YR yield - Fed Front Runner - has basically been moving sideways now since mid-September. What's that saying? A market fairly unsure of what the Fed will do this month. On the long end of the curve - 10 through 30YR yields - things are starting to look a bit different. I've commented recently how there are several signs that bonds might be ready to change their losing ways. Right now, each of these longer dated yields are, like the 2YR, bullish trend, or an upward bias. However, and this could be significant, the 20 and 30YR Yields have shifted to a more "neutral" stance. If the 20YR breaks 5.39% and the 30YR breaks 5.36%, those yields would be moving into a downward bias. Could this be a reflection of the bond market expecting growth and inflation to start to decelerate in Q1 2027? Maybe. What isn't welcome about that is that markets tend to not like it when growth and inflation decelerate together. Right now, the Atlanta Fed has decreased their GDP forecast for Q3 to 3.6%. WTI Oil was up about +6.9% in September. Oil is a big component of CPI, so that will put upward pressure on inflation data. The next growth and inflation readings don't come out until one day AFTER the Fed decides on interest rates. Should be interesting.
