Inside Markets — Small Spike in Equity Volatility

The intraday sell-off in equity markets yesterday started with a spike in crude prices, which led to a small spike in equity volatility. Kashkari’s suggestion that there may not be any rate cuts this year came after the spike in crude and had little effect on bond yields. In our opinion, realized equity volatility is the most important measure to follow in the near term. The benign macro narrative that started in November has led to subdued equity volatility and higher equity multiples.  Any change in the benign macro environment could lead to higher volatility and rapid multiple compression. Yesterday’s flight to safety move in equity markets took the CBOE Volatility Index (VIX) from ~14 to ~16.5.  A break above the 20-22 range would become a problem for the current bull market.  Once the VIX extends beyond 30, it usually takes months to swing back to equity friendly levels below 20.

The SPX keeps its near-term bullish trend intact as long as it remains above ~5160. Key technical support sits a bit lower at ~4980 with a break generating added selling pressure.

In our opinion, 10-year yields above 4.40% would become a headwind for equity markets.  Ten-year yields currently sit at 4.37% with next week’s CPI print as the significant near-term catalyst.