Good morning, Traderade family. What a week it's been so far! I wanted to provide an update on where we are in the market and what I have my eyes on right now.
Last weekend I discussed the possibility of a short-term pop, and it feels like we're seeing that relief from seller exhaustion this week as a powerful rally off the lows has taken place.
VIX: Volatility looks a little bit expensive as realized volatility is 27.33 and implied, via the VIX, is 30.52. We also see skew rising again. The combination of these two factors tells me that market hedging dynamics are healthier here. The likelihood of an elevator shaft of despair down is less likely. Orderly declines are more likely.
HY/IG spreads: Just 509 bps at the last reading, a lot lower than what I would expect if there's legitimate concern about a recession, and default rates among lower quality borrowers rising meaningfully. I still feel high yield debt is not realistically pricing in the risks we face. But for now this reading is one of a market that isn't particularly concerned about that or a potential for a bank like Credit Suisse to experience significant turmoil.
NYMO (inverted): A pretty neutral reading here. After seeing significant seller exhaustion, we've normalized. The sort of seller exhaustion we had seen was the most significant since the COVID crash, which is alarming as the COVID crash was the most exhausted the NYMO reading has ever been. As a result, a pop was likely and we are seeing one off those lows.
CBOE equity put/call: Still showing some angst, but well off the highs we saw of 1.03 from two Fridays ago, which was the highest since the COVID crash. Single stock put exposure remains elevated. Anytime we see put volume become that high vs calls on single stocks it is usually a short-term bottom.
NAAIM (inverted): Managed money is a lot less bearish than they were last week, downsizing short exposure between that reading and this week's reading. Much of the time we see managed money selling into lows, a phenom that has been relatively consistent this year.
Rydex bear/bull: We are definitely seeing more concern in terms of positioning. Bearish fund exposure is reaching toward the highs we saw earlier in 2022. We also saw retail and fund investors dumping positions over the last several weeks, which is what we would want to see if we're looking for some sign that extremely negative sentiment is actually being acted upon.
The extremes are largely behind us after the recent selling pressure that we saw which brought the market to new lows. But the potential for this pop to continue still exists. We're nowhere near seeing buyer exhaustion or extremely positive sentiment.