Studying historical averages can produce useful and interesting insights on the market. Looking at the historical average level of the VIX we can see that the CBOE Volatility Index tends to be higher around this time of the year. We showed elsewhere that this tendency is also mirrored in US high yield credit spreads (which makes sense as they are both basically market measures of risk pricing). The key conclusion then is that there is a decent chance, based solely on historical seasonal patterns, that the VIX heads higher over the coming weeks. There are always exceptions to historical average rules, but it is something to consider given the global macro risk backdrop (stress in EM, Fed tightening, political risk, softer global growth pulse).
The following is part of the Market Sentiment segment of this week’s edition of Notes From the Rabbit Hole, NFTRH 498. I’ve given it a funny name that would be less funny for a lot of people if the scenario actually plays out.
Slow Boiling Bull Frogs
Last week we reviewed Commercial Hedgers data that was bullish for the stock market and other sentiment data points that were not. The picture was mixed and our view was that a bounce (to short into, if you are bearish) was likely.
Refining that a bit, we reintroduce the ‘M’ retest possibility. It’s not a call or even a favored outcome since the stock market is still generally below markers like the SMA 50 and a series of declining highs. But as Apple showed us last week, this pig can scream higher at any time that animal spirits get unleashed.
One problem for longer-term bulls is that unlike the big, ultimately bullish event in 2015-2016 today’s SPX has not seen a corresponding rise in the VIX as the market has declined. The off-the-cuff interpretation of that is complacency that is out of whack with the flat to negative price action over the last several weeks.