The CASP: November 13, 2023
VVIX materially underperformed VIX all day long, acting as a key bullish tell in early trading, and confirming the reversal mid-day through the day. But VVIX ended up spiking and moving higher in the afternoon, a classic early indication that all is not entirely well beneath the surface of the market. It still finished red on the day despite red equities, and materially below VIX, but something bearish is in the process of building.
Lastly, the structure of the VOL complex is beginning to roll over after making a lower high, a structure seen throughout the 2022 leg of this bear market.
Both HY and IG CDXs were modestly red on the day despite flat to red equities, and throughout the day’s trading they had a propensity to fall in response to even the slightest stabilization in stocks. This CDX behavior is classic pre-equity rally behavior, which tells me more equity upside is in the works over the next couple of days, perhaps in response to CPI tomorrow and/or Biden and Xi’s meeting Wednesday.
Breadth: Moderately Bearish.
Overall breadth was as flat as the indices providing no real signal on the surface. Beneath the surface, however, the % of stocks trading above their 50dma did close near its high of the day - seemingly bullish…but, the composition of breadth was decisively defensive with Staples and Healthcare materially outperforming both SPX and RSP. Further, the fact Utilities handily underperformed alongside a bull/bear steepening of the UST curve tells me long rates are likely to become a problem for equities here soon.
Gold and oil were up on the day, likely due to Israel-Hamas headlines, while the UST curve bull/bear steepened. Meanwhile, USD was down, likely due to BOJ intervention in US morning trading. Strange mix of signals, but zooming out I believe Utilities’ underperformance on the day is the key tell that FICC is saying the long end of the UST curve is going to become a problem again here soon.
SPX Tactical Outlook
CDXs clearly say equities want higher, but VVIX behavior and breadth say risks are building. I think the set-up here is for one last spike in equities on a seemingly bullish “cease fire” meeting between Biden and Xi on Wednesday, and then the long end of the UST curve takes off to the upside into Friday OPEX, forcing equities lower into next week. How The CASP responds to that pullback will be telling for how equities are likely to trade into EOY.
The one caveat to this path is CPI tomorrow. The CASP was caught entirely off guard heading into the November CPI report last year, as October CPI surprised sharply to the downside on a downward adjustment to medical insurance inflation. That same adjustment is going to be made in tomorrow’s report, but this time to the upside. However, everyone knows this, so I’m not sure how much volatility it will induce. But it is something to watch, especially given Utilities’ suspiciously weak relative strength today.