Last week was indeed a week filled with many catalysts.
The SP1500 currently stands with 83% of its members below the mid-point of the Bollinger Band. Typically, we expect a reversion, and indeed we may get one with 65% registering fear or panic according to my sentiment measure, but larger forces are weighing on the market.
What concerns me is the inefficiencies week-to-week the options markets are demonstrating in the SP500. We would typically expect to see our weekly implied move fall within range 68% of the time. The last 10 weeks, we have been hitting 50:50. To put that into perspective though, during the low volatility period we were running at closer to 84% of all weeks.
But, when volatility hits like it has the past 10 weeks, markets currently aren't properly valuing the inherit risks in this marketplace when considering Vix (30-day fear) is at 23% yet historical volatility is at 27%. Moreover, skew is at historically low levels as well.
For the week, the SP500 Implied Move is + / - 83 points or 29% implied volatility. That means based on Friday's SPX Close we can expect the SP500 to close within 2550 to 2716. It remains a Traders' Regime.
Fedspeak is nil this week with the quiet period leading up to the FOMC Meeting next week where there is a 67% probability the Fed will increase the Fed Funds Rate by 25 basis points.
Other catalysts remain high with Economic Releases, DOE's Short-Term Crude Outlook, Brexit Vote, ECB Rate Decision, and the ongoing geopolitical and trade tensions. Implied Correlation has us focused currently on Macro Factors as opposed to single-stock factors.
Diving into the data beyond my macro views looking at a dispersion model showcases the current Top 50 stocks across a broad universe of non-corporate action adjusted names. Defensive sectors stand out.
Isolating our broad universe to the SP1500 and applying a proprietary screen demonstrates the risk-off stance of where the money has rotated.
Furthermore, if we look at a simple 52-Week High screen in the SP1500, our thesis is corroborated. That is, defensive sectors in the current regime are where capital has flowed.
We see this in our Trend Map at the Weekly and Daily timeframes.
This is most pronounced in the Levered ETP Dashboard.
Interestingly, we remain only 307 points or 10% off of the all-time highs in the SP500. However, over the last 10 weeks, the market (SPX) has been boxed in a clear range pinging from Level-to-Level.
Let's posit we are building energy to explode out of this box, since after-all persistence beats resistance. If that velocity move is to the upside, we have precedence to map us higher. But, if it is to the downside, what is possible?
Simply, we can take the range of the high-low box and map that lower. I have done that below, as well as computed proprietary SP500 Levels using weekly data.
This is your probable roadmap should volatility explode in the SP500 over the intermediate term -- Act II.
All the best,