The Market: No Volmageddon. "Just" a Correction to SPX 3721
Retiring my expectation of a volatility "event" while maintaining focus on the on-going equity market correction that has yet to fully play out.
The VOL complex continues to languish at relatively low levels, nowhere near a 2018-like “Volmageddon” event that saw the VIX rip above 30 in a matter of days. Given the morbid outlook for the economy and financial markets and how offsides market participants continue to be (both positioning and sentiment) for “tighter for longer” monetary policy inside of recession, the lack of a big move in VOL continues to surprise me. But given my focus is on equities and not VOL (i.e. buying VIX calls in anticipation of a volatility event), my anticipation of a Volmageddon event is far more a euphemism for an equity correction than anything, and the on-going slow-motion move lower in equities is precisely in line with my expectations, albeit on a more elongated time frame.
So, as is almost always the case in financial markets, just as I retire my expectation of a volatility “event” via this write-up the odds of a volatility event are likely the highest they’ve been correction to-date. I’m just no longer going to write about it, as clearly my cross-asset market analysis does not have a timely edge in anticipating how the VOL complex will react to a particular set of cross-asset market conditions.
As discussed this morning via private Xwitter, SPX DSI and 200dma breadth are in the zone for a counter-trend bounce (as is IG CDX to a degree given the lower beta move in IG CDX versus SPX on this latest SPX leg lower has closed some of the key IG CDX vs. SPX bearish divergence gaps that have pointed to lower SPX levels); however, key medium-term sentiment indicators remain materially north of the fully oversold levels that created durable multi-week trading opportunities in the January-October 2022 bear market leg. In short, SPX has more work on the downside in the coming days and weeks.
Correction Target: SPX 3721
The equal weight SPX index (ETF: RSP) has broken decisively below its March post-SVB low, clearing the runway down to the June/September/October 2022 bottoming zone. Given the materially worse outlook for the economy and corporate profits today versus then, a full retest of the specific October 2022 low, -6% from here, seems logical. Ultimately, RSP is headed far lower, but for now a durable trading low is likely to form around the October 2022 low on the back of excessively pessimistic short-term sentiment.
Mapping this out, in the 2022 bear leg RSP outperformed SPX by approximately 4% on two sharp down-legs in SPX as a result of NDX underperformance. I believe a very similar dynamic is setting up today, perhaps catalyzed by a disappointing AAPL ER on Thursday November 2 on the back of a sneaky-hawkish Powell on Wednesday November 1.
If RSP moves down to its October 2022 low and outperforms SPX by 4% on the way down, the math suggests an SPX tactical correction target of 3721.