Discussion
As discussed yesterday, I was looking for an opportunity to go long yesterday if signals confirmed. #1 I wanted to see HY CDX bullishly diverge from SPX and NDX, down 5-7 bps on the day with the indices red. Instead, HY CDX went green as equities corrected into EOD, providing little in the way of a decisive signal in either direction. #2, I wanted to see VVIX behave in the way it typically does before big rallies - quick to turn down on the first sign of equity market stabilization, and a series of lower highs and lows throughout the day. Instead, we got the opposite. VVIX quickly moved from red to green and then stayed solidly green all day.
Today we’re getting signs.
VVIX was solidly green this morning as equities sold off on a hot PPI print, but has since trended lower and is much quicker to turn down once equities stabilize.
Breadth is stronger than reddish indices would indicate.
And most importantly, HY CDX is not blowing out to the upside as it would in a decisive continuation of the equity market correction, and is pretty quick to turn lower at the first sign of equity stabilization.
The one potential bearish caveat to these moderately bullish signals is the outperformance of defensive sectors. However, as noted in the EOD update last night, my thesis was defensives lagging was a sign that rates were likely headed higher, which is what ended up playing out today in the wake of the hot PPI report. So, continuing with that logic, today’s defensive sector outperformance is either a sign rates could start to move lower in coming days or that the Fed will need to stay tighter than anticipated, thus imparting greater harm on the economy than the market had anticipated. These are admittedly micro-time frame observations, but I’m just talking through the logic of defensive outperformance given the broader package of mildly bullish cross-asset market signals.