Morning Notes — Volatility Catalyst

SPX sensitivity: Financial markets are closely tracking coronavirus outbreak metrics and ignoring the headlines. And the S&P 500 is giving any positive angle the benefit of doubt due to other highly supportive factors including: 1) unprecedented levels of stimulus; 2) booming US money supply/liquidity; 3) China’s near-complete recovery; 4) expectations for a fifth US fiscal support package; 5) still-light equity positioning from Vol Targeting, CTAs, Hedge Funds and individual investors and; 6) still elevated bearish investor sentiment. The positive angle on the outbreak in US South and Western regions is a very low mortality rate given a younger demographic and recently declining new case/testing ratios in TX and AZ. Peaks in metrics like the new case/test ratio have been early indicators for peaking infection rates in other US regions and globally.

Volatility: A Bloomberg report called attention to how the CBOE Volatility Index (VIX) has remained stubbornly elevated despite the ~40% rally in the S&P 500 from the March low. The article also covers elevated demand for other hedges like Gold and long-duration fixed income, which they link to fresh outbreak fears, an eventual end of fiscal stimulus and the limits of monetary stimulus. That’s the consensus view and the most crowded trade. Keep in mind, the summer months tend to result in reduced volatility and nine different ‘VolatilityShares’ ETNs (TVIX is the most popular) are in the process of being delisted. And reduced volatility is what Vol Targeting and many CTA funds use as triggers to re-enter normal long-equity exposure.