VIX - Will It Follow The Seasonal Playbook?

1.) LEVERAGE – Yesterday, I commented on leverage in the system and how many are likely looking at it through the wrong lens. Today, I want to address “leveraged ETFs (exchange-traded funds).” The argument might go like this: “Nobody uses margin anymore. Everyone just buys leveraged ETFs.” Again, the numbers don’t support it. All of the leveraged ETFs, leveraged ETNs, and leveraged single-stock ETFs combined hold less than $200 billion in assets. That’s only about 0.25% of the total U.S. stock market. Now, if you’re still worried about leveraged ETFs blowing up the world, let’s consider what has been happening beneath the surface. The amount of assets in leveraged ETFs has dropped by over $100 billion! And of that $100 billion, $63 billion of those assets has come out of semiconductors. To contextualize that, 39% of leveraged semi ETF assets has been reduced. So, not only is the amount of leveraged ETFs not that big in terms of the whole market, but even what is out there has been dramatically reduced. This decrease is one of the healthiest things that can happen for the market.

2.) VIX – Seasonality is something to watch, but not be anchored to. In other words, knowing how the history of VIX has traded around the calendar is helpful and something to be mindful of, but not something to say "always" will happen. Volatility traders are complex beings. There is far more to trading volatility than seasonality. But as I mentioned, it's worth noting that this is typically when the VIX's second seasonal upswing begins. So, bracing for some upside move in VIX (higher volatility for the S&P 500) is probably a decent idea.

3.) BONDS – For decades, stocks and bonds were supposed to balance each other out. Stocks helped grow your money. Bonds helped protect it. But markets evolve. Inflation comes and goes. Interest rates move. Investor behavior shifts, and eventually, the old playbook stops working. Is that happening today? The data says...for now...yes. Stocks, bonds, and energy are no longer behaving the way they used to. This chart is actually much simpler than it looks. The blue line tracks how closely energy stocks move with the S&P 500. The red line does the same for Treasury bonds. The higher the line, the more those investments move with the stock market. The lower it goes below zero, the more they tend to move differently. For years, bonds were the investment that behaved differently. That’s why they were considered a hedge. Energy generally moved right along with stocks. But today, we’re seeing almost the opposite. Bonds have become much more closely tied to the stock market, while energy has become one of the few major areas sort of moving to its own beat. This has huge implications for the traditional “60/40” portfolio…60% stocks, 40% bonds. In short…it may actually be dead! Instead of asking “how much should I own in bonds,” an investor should be asking “What actually behaves differently than the rest of my portfolio?” Lately, energy has been different. That doesn’t mean energy always rises when stocks fall. Markets aren’t that simple. Correlations change over time, and they are never perfect. But diversification has never been about owning different ticker symbols. It’s about owning investments that don’t all react the same way at the same time. This is a reason our Tiger and Grey Wolf Model algorithms have functioned well. Are bonds finished forever? Not hardly. Bond prices can at some point rally. A big test is near for the US 10YR Yield. If it fails at 4.62%...we likely see a bit of a bond rally. If, however, it slices right through that resistance…well, bonds would not be a great allocation. A “tell” on bond movement will likely come from the MOVE Index (bond volatility). It’s still in a downtrend, but a break above 80 and hold could change that. Bond volatility breaking out would not be good for stocks or bonds. We’re not there yet...but maybe VIX seasonality takes us there.