Market Journal: Don't Be Fooled
Today is exceedingly bearish beneath the surface of a "buoyant" SPX. The only bullish offset is VVIX.
Discussion
I have no idea why given the decisive “hard landing” outlook in place, but the 3y/10y UST curve is re-inverting supposedly in response to better-than-expected initial jobless claims data this morning, and the March 2024 Fed Funds futures contract is confirming by taking out some of the rate cuts priced to start around then.
I’m largely agnostic to the path of the economy as long as the Fed’s commitment to 2% inflation remains intact (which I believe to be as indicated by a deeply and persistently inverted UST curve), so whether today’s re-inversion is another fakeout soon to be unwound by worse-than-expected economic data or is in fact a leading indicator of an economic reacceleration (as indicated by a sharp recovery in manufacturing PMIs in the coming months), the fact of the matter is the “guts of the stock market” (as Stan Druckenmiller likes to say) are beginning to shift into a risk-off position, and today is the most stark shift shift-to-date.
Defensive sector relative performance today is very sharp.
Overall breadth is decisively negative, especially for a flattish SPX day.
And HY CDX continues to base and negative diverge from SPX.
The only bullish offset to the above is the VOL complex, which is decisively red on the day. My hunch is this is an options expiration phenomenon, because it just does not line up with the above. Typically when VVIX in particular is red on a red SPX day, there is other confirmation that a bullish reversal in SPX is nigh - but there is no other confirmation currently in place.