Happy Sunday, Traderade family! Let's take a look at what's going on underneath the surface of the market as we're seeing some signs that warrant attention.
What a wild week we had! 166 S&P 500 companies reported, including a lot of pivotal tech names. We saw significant volatility during regular trading hours and the extended trading session.
AAPL's earnings seemed to save the market, at least for now, as Friday's close led the S&P 500 3,901.06 with significant upside breadth and all 11 S&P sectors in the green. On the day AAPL was up 7.56%, its best day since July 31st, 2020.
VIX: We're seeing what appears to be a discount in implied volatility for the S&P 500 as 1-month realized volatility as we see IV at 25.75 and RV at 28.15. If we give dealers a two point premium for the risk they're taking on, we could say that the VIX is about 4.4 points too low. Combine this reading with low and falling put skew and we can reasonably speculate that this is a poorly hedged market.
HY / IG spread: Confounding many, including myself, are the very low spreads between high yield and investment grade corporate debt. During most recessions we see this spread blow out above 1000 bps or 10%. Thus far just 476 bps, as HY debt has been surprisingly resilient as corporate debt pricing plunges below COVID lows in many issuances. Eventually I believe something has to break, and spreads are likely to widen as higher risk borrowers show signs of financial stress and liquidity is further constrained across capital markets.
NYMO (inverted): We are seeing a market that is quite overbought as the reading is well above 80. Previous occasions when NYMO is this overbought often lead to a rise in volatility and a fall in equity market pricing. While past isn't always prologue, I think it's important to note that the recent rise is starting to look a bit extreme short-term, meaning a pullback or consolidation isn't out of the question.
CBOE equity put/call: Buyers are bullish again — for the most part. Over the last week we've seen significant activity on several days where call buyers were piling into short-dated near to the money calls in a variety of lower quality stocks. This is often a danger sign for the sustainability of a short-term upward move. While we aren't at an extreme (below 0.5), I do look at the way single stock options are being traded, and particularly what stocks are being focused on, with some concern.
NAAIM: The bulls are back. Managed money got long again, buying the rip after selling the last dip. These survey readings on money manager positioning have been a relatively good contrarian signal anytime they reach an extreme, and we are approaching one in terms of bullishness for a bear market. Caution may be warranted.
Rydex bear/bull: Off the bearish extremes and into a more neutral territory. We had seen a lot of increased exposure to bearish funds during the last drawdown in equities, but that has largely reversed.
There is some reason for caution in terms of bullish positioning as we see some warning signs of volatility being rather cheap, HY spreads mispriced, NYMO overbought, bulls coming back to low quality stocks via call options, and managed money getting quite bullish again.