Although Fed Chairman Jerome Powell received awards for his press representative on Wednesday afternoon, market participants changed their minds on Thursday. In other words, buyers showed up noticeably Wednesday afternoon after the Fed held rates steady and released an updated dot-plot forecast that included a significant upward revision of its 2021 gross domestic product (GDP) forecast. In fact, Powell reiterated that he expected the Fed to keep rates where they are through 2023, even after being asked about the possible inflationary impact of that expectation.
On Thursday morning, after taking the time to digest the new forecasts and the ramifications of Powell’s message, bond yields rose again, dragging tech stocks down at the beginning and the rest of the market at the end.
3/19 $ SPY open interest. 397 & 400 strike calls were mostly bought (to open), so longer $ SPY remains under these strikes, associated long positions will slowly be liquidated. The delta hedge selling risk does not set in until it moves near the Put Heavy 370 strike pic.twitter.com/DvHam0hkJw
– Todd Salamone (@toddsalamone) March 15, 2021
In fact, the high of the week for the SPDR S&P 500 ETF Trust (SPY – 389.48) was $ 397.26. After the SPY sank lower on Thursday morning and it was evident that the 397 strike would not be repeated, the SPY moved to the closing price, possibly due to the liquidation of long positions associated with the expiring 397 and 400 strikes. The call related to an open interest.
“…For the second time in so many weeks, Thursday and Friday VIX spikes failed to hit their 252-day moving average, suggesting that the bulls will be in control as they enter this week’s trade. In fact, this long-term moving average (which is the VIX average for a year) has peaked at the VIX peaks four of the last five times since mid-December.
Right now the script is: If you are using the VIX as an indication of the direction of equity, be careful as this volatility expectation measure retreats to area 20 like in early December and mid-February. Additionally, if the VIX hits its 252 day moving average and shows signs of pulling back, be a buyer. But buyers watch out – when the VIX closes above the 252 day moving average, prepare for a shorter-term stock damage. ”
– – Monday morning outlook, March 8, 2021
After my comments on 3/8, now is the time to start thinking about hedging long positions. $ VIX has retreated to mid-August, late November, and mid-February lows that preceded overwhelming short-term stock action https://t.co/3ozT0MM4JP
– Todd Salamone (@toddsalamone) March 17, 2021
After the Fed meeting and Powell’s press conference on Wednesday, the Cboe Market Volatility Index (VIX – 20.95), also known as Wall Street’s “fear measure,” closed at its lowest level in more than a year. As I observed on Twitter, value has been back to levels that preceded equity weakness since the stock market hit its pandemic low in March 2020, and retreats have followed.
As I’ve found in the past, once the VIX expires, the VIX is more prone to pops, which was the case last Wednesday. However, this was the case when Call Open Interest prevailed, a scenario that has been around for years.
Note in the graphic below that for VIX futures options that expire in April, May and June and starting at the end of February, open interest exceeds open interest. Such situations are rare. But historical events in the past preceded a bearish VIX. This time around, the VIX Open Interest gained traction over the Call Open Interest as the VIX hit its most recent high around its 252-day moving average.
The current open interest configuration for VIX futures could indicate that the VIX will drop below the 19-20 minimum level in the coming weeks or months.
– Todd Salamone (@toddsalamone) March 19, 2021
Meanwhile, the S&P 500 Index (SPX – 3,913.10) has been trading on a well-defined channel since mid-November, when the headlines about Covid-19 vaccines turned downright positive, suggesting support for a light at the end of the month Year supported tunnels for a return to normal.
In fact, the SPX tested that channel’s lower bound on the sale that occurred late last week. If the SPX continues to trade on this channel, it would make sense for the VIX to drop below its multi-month reserve price.
At the start of trading this week, the top of this channel is in a range between 4,045 and 4,065, but resistance could also appear at around 4,000 millennia and 4,056 levels, which is six times the 2009 closing low.
The lower bound of this channel is between 3,910 today and 3,930 at the weekend. If the SPX falls below this range, look for the 3835 to 3850 range that comes into play. Here is an expanded trendline drawn through lower highs in February. The pre-breakout closing level above this trendline two weeks ago was 3,875, thus providing another level of support before 3,835-3,850 come into play. Coincidentally, the 40-day moving average of the SPX is 3,875.
In fact, a later decline in this ratio after a surge in put / call volume only for stocks to multi-month highs paves the way for the SPX to break away from last week’s support as traders’ short-term skepticism peaked.
However, the peak was at a relatively low level, suggesting that the market could quickly become vulnerable after only minimal progress.
After Thursday’s trading, my volume on CNBC was on but my back was turned to the TV. I heard many guests point out that the big cap tech retreat was an opportunity to buy. From this perspective only, I would advise being careful when stepping into these waters.
However, the 10-day put-to-open put / call volume ratio for components of the Nasdaq 100 index (NDX – 12,866.99) rose only approximately to the November high and is now rolling over. A similar action in this ratio was a buying opportunity in November, so there is a sentimental uptrend.
If you are looking for some technical permit to get into a bullish large cap tech trade that is recommended, I think it would be best if you were looking for resistance that I discussed last week to be taken out. As per the chart below, note that the NDX is climbing back above some combination of its 40-day moving average, which marked the high of last week. Additionally, the 13,000 and 13,037 levels, which are a 50% Fibonacci retracement of the recent closing highs and lows, remain significant.
In the meantime, good luck with your brackets. While most of you won’t take advantage of your investment in the tournament games, remember that options give you the year-round leverage that you are looking for. And with the VIX recently hitting its lowest level in months and the profit season is over, options are cheap.
Todd Salamone is Schaeffer’s Senior VP of Research