Will VIX Fail At Trend...Again?
1.) BONDS – I’ve written about this before, but it bears repeating. Bonds are no longer a safe asset protecting against equity market corrections. The cycle that started in 2021 has changed the characteristics and effects of bonds in a portfolio (see this post). Now, to be fair, there will come a time, and it may not be far away, when being a contrarian will be rewarded by buying bonds. Are we there yet? Not according to rates and inflation.
2.) RATES – No rest for the weary (bondholders). Rates across the yield curve continue to say, “We don’t see a recession…but we do see inflation,” as oil trades near $105. 2YR yields through 30YR yields are up again this AM, with the 2YR now up over +12% in the last month from 4.15% to 4.65%. We’re now getting our first overbought reading in that 2YR since May. While rates are definitely higher now than they were then, May did see a bit of a pullback in those rates. At the very least, this may settle thiThats rate move down some.
3.) VIX – Last week I asked if short-term risks were rising due to volatility “waking up,” the spread on Japan’s bond yields vs. VIX, and oil moving up. We certainly saw VIX wake up last Tues through Thurs, then “collapse” Friday. Today it’s up again as traders are buying protection, likely due to the Fed meeting this week where they will decide on interest rates. Traders might also be buying protection on the artificial intelligence joint declaration and the Houthis taking over another major trade route that pushed oil higher. I said last week that some catalyst that is not yet known would be needed to really change market characteristics. No one was talking about either of those issues. If everyone on X is already discussing a risk, the market knows about it and has probably priced it in. The information that matters is usually what nobody is talking about. Of course, that makes “knowing” and acting on that risk impossible. This is why we employ a systematic process that is mathematically and algorithmically centric. What is VIX telling us right now? The VIX characteristics today are very similar to the last spike at the end of July. I would argue that this current bout of rising volatility gets washed out. Why? Well, one element might be that everyone is expecting a rate hike this week. What if that doesn’t happen? I think traders take their protection off and buy futures. If that happens, VIX falls and markets move higher. The S&P 500 also has an implied volatility premium of 56%, up from 37% one week ago and up from 26% one month ago. That points to rising fear and buying or protection. Those put options, when they get taken down, tend to drive buying in the markets. Remember, well hedged markets don't tend to "crash". Let's see if the Fed "surprises" everyone this week and VIX fails at trend (shaded area) again.
