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Inside Markets — Volatility Concern

Volatility Concern

September 27, 2023

The SPX is down ~7% from its YTD high on July 31 as 10-year Treasury yields have risen from 3.96% to a cycle high of 4.54% yesterday.  Importantly, the move in yields hasn’t been driven by fundamentals as 10-year inflation breakeven yields have actually dipped a few basis points during that period. Over the last two months, the market narrative has also shifted from soft landing to recession or something worse.  While it’s just a single data point, yesterday’s move higher in yields followed a weaker-than-expected consumer confidence print, which has the look and feel of stagflation.

The ~7% pullback in the SPX and ~8% pullback in the Nasdaq 100 (NDX) has taken both benchmarks into oversold territory. Our definitions for oversold and overbought are based on a slowed stochastic measure of price and time.  Note that individual securities and indices can stay oversold or overbought for weeks before reversing. Technical support for the SPX sits at the ~4200 bullish inflection from early June.  While the move to oversold increases the likelihood of a relief rally, higher realized volatility remains our primary concern and the reason to stay defensively positioned.

The CBOE Volatility Index (VIX) closed above 18 yesterday and pushing north to 20 this morning.  In our experience, levels above 18 have a tendency to become progressive with volatility reaching escape velocity at levels above 22.  Elevated realized volatility becomes a strong headwind for rally attempts and it often takes months for it to return to more benign, market friendly levels below 18.  

It’s a quiet day of headlines, with the focus on the potential for a US government shutdown despite a relative lack of market interest. The Senate voted to advance a short-term continuing resolution that would fund government through November 17, but it remains unclear if McCarthy will allow it to come up in the House. There is nothing new on the UAW strike other than Elon Musk noting that 40%+ pay raises would put the OEMs on a path to bankruptcy.

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