Inside Markets — Position Squaring

Position squaring into Powell’s Jackson Hole address accounts for today’s price action as there’s some concern his overall message could sound more hawkish than the present narrative. This follows yesterday’s BLS payroll revision and Fed minutes that seemed to confirm a softening labor markets backdrop and plans to cut rates in September. Fedspeak over the last 24 hours play into the concern surrounding the start of an easing cycle, with multiple Fed officials commenting on the strength of the labor market.

Broad implied equity volatility (VIX) returned to subdued levels below 20 in a record six sessions on 8/13. The record retracement in the VIX, wide open corporate stock buyback window and light attendance during the last two weeks of August should keep the pain trade aimed higher. But light attendance, low volumes and thin liquidity also generate higher single stock volatility and all bets are off if the VIX trades beyond 20-22.

We sidelined our tactically bearish outlook after the SPX broke above the downside gap (5447) that developed after July payrolls missed expectations on 8/2. The bearish trend dynamic may no longer exist, but many stocks have now returned to overbought levels as the index tests resistance at the July high of 5667. At this point, we’re reluctant to chase the impressive rebound as the aforementioned buyback window closes in mid-September when seasonal weakness tends to kick in. A break above 5667 should bring a bit more upside to ~5745 (~1.4%), while a break below 5455 would confirm a trend reversal to first level support near 5325. But if the VIX returns to elevated levels above ~22, we’d expect next level support near 5130 (August low) to be a more realistic near-term target that implies ~6% downside from 5455.