Good morning, friends! Here's a quick check-up on the market as we get this busy trading week started!
VIX: Implied volatility (IV) on the S&P 500 has been falling, catching down to realized volatility (RV) as we see a compression in a market that was quite nervous. That compression of IV catching down to RV helped to fuel the recent countertrend rally. The last reading of the VIX was 22.79, whereas S&P 500 1-month RV is 20.10, suggesting that the market could still see this trend continue of volatility compression fueling a bit more upside.
HY/IG spreads: We see high yield spreads compressing again, which is curious in an environment where by any reasonable definition high yield debt is expensive in that it doesn't weigh in the growing chances of defaults as we navigate through this Fed tightening cycle. During prior recessions this spread has blown out to over 1000 bps. We've also curiously seen high yield debt outperform investment grade, which is not something one would expect to see. Curiously watching and waiting to see how this resolves, but I think HY debt is still too expensive here.
NYMO (inverted): We've neutralized the severe oversold condition I've mentioned recently, where NYMO was at below -100. This, along with IV > RV (by quite a lot), and managed money being quite bearish helped to lead to this pop as there was some seller exhaustion and nervousness that needed to be reconciled. For now NYMO is essentially neutral and not giving us much of a reading one way or the other. I like to use it to gauge extremes as they can be helpful contrarian indicators if we see convergences on other market measures as well.
CBOE equity put/call: We are back in bullish sentiment within the demand for calls vs puts in stocks. We haven't yet reached an extreme, but aren't far from it. Which means it is probably a good time to be nimble with the more popular stocks in this pop. Much of their upside was driven by delta squeezes that may begin to run out of juice as we approach triple witching. The other side of that, however, is that there's enormous single stock put exposure here. That lopsided positioning could open up further upside if speculators exit their puts, or as their puts decay, adding liquidity to the market.
NAAIM (inverted): Managed money became more bearish last week, selling into a market that was experiencing a relief rally. This positioning is not yet extreme on the bearish side, but it is noteworthy. It tells us that money managers have both cash on the sidelines as well as short positions against the market which could act as fuel for upside. But I would caution reading too much into this given that we don't have convergence on other indicators.
Rydex bear/bull: We're seeing a steady climb back into bearish funds, but nothing that suggests an extreme. There's still a fair amount of complacency at these levels.
There is room for further upside in this market, but we remain in a bear market and it is likely that after this pop exhausts we could see lows retested, and quite likely new lows. Short-term trades to the upside are potentially rewarding, but don't lose track of the longer term trend in swings and investments.