Inside Markets — Dynamic Market Environment

Maybe it goes without saying that this is an extremely dynamic market environment with tail risk on both sides of the distribution.  As we noted on Tuesday, systematic positioning is full/nearly full and there’s risk of this unwinding for technical reasons only.  The CTA community often uses simple moving averages as buy/sell triggers, which makes the 50-day average on the SPX at 6555 the near-term level to hold.  Given the technical set up, we’d become incrementally cautious on a sustained close below the 50-day average. As the name implies, volatility-targeting funds use realized and implied equity volatility as a trigger.  Todays plus tick in the CBOE Volatility Index (VIX) above 23 is a bit troublesome.  We’d expect these funds will begin to shed some length if the VIX sustains closing levels above 22.  At a minimum, VIX levels >22 tend to act as a headwind for rally attempts. From a micro fundamental perspective, management teams from the largest US banks offered a reassuring message on state of the US consumer with spending growth in the mid-single digits and no mention of meaningful credit deterioration.  However, it’s important to note that large banks tend to have limited exposure to subprime borrowers.  And the eventual release of currently suspended government data is another risk (both sides) to be mindful of.