August 15, 2022
SPX: The S&P 500 (SPX) managed to push through key technical resistance near 4180 after the NY Fed’s prices paid/received component showed sharp deceleration. The index also took out the next major technical level at 4255 in the aftermath of last Wednesday’s lower July CPI print. We thought the SPX would spend more time consolidating in the 4075-4180 range as terminal Fed expectations probably needed at least two months-worth of decelerating realized inflation data before inflecting lower. Terminal Fed expectations ticked a bit lower after Wednesday’s lower CPI number, but at ~3.50%, terminal Fed expectations still remain ~100bps above neutral. Dominant cross market correlations tend to fade without warning and it’s also possible the stronger than expected July Jobs Report moved the bar on the labor markets perceived ability to withstand higher rates. That aside, a sustained break above ~4255 meaningfully improves the intermediate term technical outlook. And a break above ~4328 would likely add momentum.
Positioning: Systematic funds represent a significant piece of trading volume. Desk flows suggest that volatility targeting strategies and risk parity/dynamic risk platforms became net buyers last week. Prior to the CPI report, buying interest mostly came from short covering. All accounts suggest CTA equity exposure remains below 20% and this group is still net short with some covering occurring after the SPX sustained levels above its 100-day moving average at ~4122. We should see more significant CTA buying interest above the 200-day moving average at ~4328.
Volatility: The CBOE Volatility Index (VIX) has finally decelerated below 20 after spending most of the year in a range between ~25 and ~35. We consider levels above 20 a headwind for sustained equity market rallies. The VIX spent about a week below 20 back in late March-early April before moving back to ~35 in early May. The most common cause of elevated equity volatility (VIX) is increased rates volatility as measured by the MOVE index. Rising rates volatility tends to widen credit spreads, which pulls the VIX higher. Fed meetings and CPI prints have been the primary drivers of rates volatility this year, which makes the September 13th CPI report the next major catalyst with the potential to restart the cycle. Calmer VIX levels over the next 3-4 weeks could remove a major headwind that has been stalling rally attempts all year.