Tag: VIX

Can the Fear and Greed Index guide your investments? It’s showing ‘Extreme Fear.’
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The Fear and Greed Index is leaning far into the “Extreme Fear” measure. However, if you know anything about such measures of investor angst, you may ask, “Which Fear and Greed Index?”

There is one trusted Wall Street measure of uncertainty — the VIX, a volatility tracker from the Chicago Board Options Exchange — and there are other gauges that measure investor sentiment toward cryptocurrencies and gold.

If you want a sentiment barometer for your portfolio, the investment will determine which Fear and Greed Index you will want to reference.

Read more: Prediction markets: What they are and how they work

The VIX is the most widely watched measure of volatility in the stock market, and there has been a recent spike in the VIX.

Yahoo Finance Markets and Data Editor Jared Blikre and “Asking for a Trend” host Josh Lipton provided an overview of market trends, including the VIX, on late Thursday.

“The VIX has been trending higher,” Blikre said. “The VIX also historically tends to spike in October and November. So the worst might not be behind us.”

However, market volatility is not necessarily the same as “fear and greed.” For that, you might look at the CNN Fear and Greed Index, which is showing “Extreme Fear” as of Nov. 21.

CNN’s Fear and Greed Index measures:
- Market momentum: By tracking 125-trading-day averages of the S&P 500 index.
- Stock price strength: This is the number of net new highs or lows on the New York Stock Exchange.
- Stock price breadth: This is a measure of stocks on the NYSE that are rising compared to those that are falling.
- Put and call option: Puts are options to sell; calls are options to buy. If the ratio of puts to calls is rising, it’s a signal of bearish investors.
- Market volatility: Using the VIX, if volatility rises, it’s a sign of fear.
- Safe haven demand: This is a measure of when Treasury bond returns are higher than stocks over 20 trading days.
- Junk bond demand: When investors turn to high-yield bonds over government bonds, it’s a sign of greed.
While financial advisors may recommend only a sweetener of cryptocurrency to a risk-adjusted portfolio, this is the Fear and Greed Index that gets the most swing for the money. Cryptocurrency has a boom-or-bust mentality that changes frequently.

CoinMarketCap measures crypto market sentiment with its Crypto Fear and Greed Index, which, coincidentally or not, is also in the “Extreme Fear” mode.

CoinMarketCap says it calculates the index using five factors:

Price momentum: This measures price performance of the top 10 cryptocurrencies by market capitalization (excluding stablecoins).

Volatility: The index measures expected volatility over the next 30 days in the trading of bitcoin and ethereum.

Derivatives market: Like CNN’s stock fear index, CMC considers the put/call ratio — but instead of stocks, it’s looking at the bitcoin and ethereum options markets.

Market composition: Measures the relative value of bitcoin and that of major stablecoins.

CMC proprietary data: Includes keyword searches, user engagement metrics, retail interest, and emerging trends.

Finally, there’s the gold Fear and Greed Index. Stock market pessimists have long advocated stashing a pile of gold bars in the basement.

JM Bullion sells precious metals and hosts a Fear and Greed Index for Gold, which is now solidly planted in the “Greed” quintile.

The price of gold has jumped recently, as the equity and crypto markets have stalled.

JM Bullion states that its fear index considers physical gold price premiums, gold spot price volatility, social media sentiment, retail activity, and Google Trends for gold search terms.

Read more: How to invest in gold in 4 steps

Of course, the answer is that neither fear nor greed should play a part in investment decisions. While it may be entertaining to know if the world thinks it is on fire or merely burning, your life after work needs to be financed.

Lisa Shalett, wealth management chief investment officer for Morgan Stanley, recommends investors maintain a focus on strategic asset class diversification.

“Real assets, municipal bonds, intermediate-term U.S. treasuries, real estate, and select private infrastructure are our favorite opportunities to add,” Shalett said in a Morgan Stanley video insight in October.

“Bull markets are meant to be ridden and not timed, and our foundational advice is to be fully invested according to your strategic asset allocation,” she added.

Read more: Create a stock investing strategy in 3 steps
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November 21, 2025
So much for 'the January effect': Here are five things that could interrupt the U.S. stock market rally in early 2024.

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U.S. stocks capped off a wild 2023 with a two-month sprint that has carried the Dow to record highs and the S&P 500 index to within a whisker of a similar milestone.

But after such a powerful advance, some portfolio managers and strategists are concerned that the market could suffer its own post-New Year’s Eve hangover once the calendar turns to January 2024.

Instead of providing a tailwind for the market, several who spoke with MarketWatch worried that the “January effect” might work in reverse as investors scramble to lock in gains after the S&P 500 rose 24% in 2023, according to FactSet data.

“Any time you have a big burst like that, I think you’re vulnerable to some profit-taking,” said James St. Aubin, chief investment strategist at Sierra Investment Management, during an interview with MarketWatch. “It wouldn’t surprise anybody to see the market cool off a bit after a strong run.”

From high valuations, to bullish sentiment indicators, to economic data, to geopolitics and beyond, here are a few things that could trip up the market in January.

U.S. stocks are already overbought

A technical gauge that’s widely followed by Wall Street portfolio managers and technical analysts has been screaming that U.S. stocks are overbought for a month.

The 14-day relative strength index on the S&P 500, a momentum indicator that’s supposed to help put the magnitude of the index’s latest moves into context, climbed as high as 82.4 on Dec. 19, its highest since 2020, according to FactSet data.

FACTSET

Although the RSI has since pulled back, it continues to hover around 70, seen by analysts as the threshold for when something can be considered “overbought.”

Sentiment has swung from extremely bearish to extremely bullish

In the span of just two months, investors have gone from incredibly bearish to incredibly bullish, according to the American Association of Individual Investors’ weekly sentiment survey.

That should give investors pause, since the gauge is seen as a reliable counter-indicator. When sentiment becomes stretched in either direction, it can signal that the market is about to turn. Investors say that is what happened back in July, and also in October after the S&P 500 touched its 2022 bear-market nadir.

RAYMOND JAMES

According to the AAII survey published ahead of the Christmas holiday, nearly 53% of respondents said they were bullish, the highest since April 2021. That number came down a bit this week, but it remains high relative to levels from October.

The VIX is extremely low

Wall Street’s favorite “fear gauge” is giving the all-clear. To some, that’s reason enough to worry.

The Cboe Volatility Index
VIX,
better known as the Vix, measures implied volatility, or how volatile traders’ expect the S&P 500 to be over the coming month based on trading activity in options contracts tied to the index.

In December, the Vix dropped below 12 for the first time since before the advent of the COVID-19 pandemic.

Nancy Tengler, CEO and CIO of Laffer Tengler Investments, said in emailed commentary that she is keeping a close eye on the Vix. Once volatility starts to climb, investors should consider taking some chips off the table.

Progress on inflation could stall in January

Some investors are already anxious about the next U.S. inflation report, due Jan. 11.

The Cleveland Fed’s inflation nowcast has core CPI rising more than 0.3% in December. If this proves accurate, it would be the hottest inflation reading since May.

And even if core inflation comes in slightly cooler, stocks might not greet it with the same enthusiasm they have shown in the past.

“U.S. CPI for December will hopefully continue to show a disinflationary trend, although the question is: can we keep rallying on this same dynamic?” said Larry Adam, chief investment officer at Raymond James, in emailed comments.

Earnings season could disappoint

For three straight quarters beginning with the final three months of 2022, the largest U.S. companies saw their earnings shrink on a year-over-year basis.

This “earnings recession” finally came to an end in the third quarter, but the conundrum that investors now face is whether companies can manage to satisfy Wall Street’s lofty expectations for 2024.

The artificial-intelligence software boom and the fact that the U.S. economy avoided a recession in 2023 has helped boost analysts’ confidence about earnings, strategists said.

According to the bottom-up consensus estimate from FactSet, analysts expect S&P 500 aggregate earnings to increase by 11.7% for the calendar year 2024.

“Markets have been baking in this 11.7% earnings growth figure for a while now. That’s a lot of optimism,” Goldman said during an interview with MarketWatch.

And that’s not all…

To be sure, this list is hardly comprehensive.

Politics and geopolitics also came up a lot in discussions with analysts. Investing professionals cited Taiwan’s upcoming presidential election, another looming federal debt-ceiling showdown in the U.S., the beginning of the 2024 Republican presidential primaries, the ongoing conflicts in Gaza and Ukraine, and more as potential threats to market calm.

Some expressed concern that the Treasury could spark a selloff in bonds and stocks with its next quarterly refunding announcement in early 2024.

But in the view of Cetera’s Goldman, a dynamic that Wall Street traders call it “buy the rumor, sell the news” could represent a bigger threat.

The thinking works like this: investors have already front-run aggressive Federal Reserve interest rate cuts. So, if the Fed delivers, the rush to take profits could drive stocks lower instead of propelling the main U.S. indexes to new highs. Put another way, many strategists believe investors have already priced in pretty aggressive Fed rate cuts.

So unless the central bank finds a way to deliver something even greater than what Wall Street is expecting, the main U.S. equity indexes could struggle to continue their advance.

“Markets are already buying the rumor that we’re going to have a better 2024, that the Fed is going to cut rates, that breadth is going to widen,” Goldman said.

“Maybe we’re already seeing that priced in.”

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December 31, 2023
Chaotic 'triple witching' set for Friday, as $5.3 trillion in options expire

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Options contracts tied to more than $5 trillion worth of stocks, exchange-traded funds and indexes are set to expire on Friday as the latest “triple witching” expiration event collides with the rebalancing of the S&P 500 and Nasdaq-100.

The result could be a high-octane, and potentially extremely volatile, session where tens of billions of contracts and shares could change hands, market strategists said.

According to figures from Rocky Fishman, founder of Asym500, options with a notional value of $5.3 trillion are set to expire, with the biggest slug expiring ahead of the open.

ASYM50

On one side, many traders will be cashing in bullish bets that are deep in the money, while some roll their positions, forcing market-makers to continue to hedge their exposure.

At the same time, managers of index-tracking funds will need to finish adjusting their holdings before the announced index changes take effect.

Already, trading volume has been trending higher all week. In the U.S. market, 17 billion shares changed hands on Thursday, according to Steve Sosnick, chief market strategist at Interactive Brokers, during a phone interview with MarketWatch. That is up from 10.6 billion on Tuesday.

“I expect to see enormous volumes tomorrow in a lot of popular names,” Sosnick said.

“Not only will this one be the largest option expiration of the year (as is typical for December), but it is currently set up to become the largest SPX option expiration in more than a decade,” Fishman said in a report shared with MarketWatch.

Brent Kochuba, founder of Spotgamma, an options-market analytics provider, went even further during a phone interview with MarketWatch: “This might be the biggest options expiration ever.”

ASYM50

As markets have rallied, traders have been scooping up bullish options contracts at a record pace, according to data from Cboe Global Markets, the biggest operator of options exchanges in the U.S.

For S&P 500-linked options, typically the most popular product, 4.8 million contracts changed hands on Thursday, according to Cboe, a new record, surpassing the previous record from Nov. 14.

Also, total call-trading volume for all U.S. equity options exceeded 30 million contracts on Wednesday, according to Goldman Sachs Group, making it one of the busiest days for trading in bullish contracts this year.

Aggressive call-buying over the past month has helped push the S&P 500 to just shy of its record closing high, options-market experts said. The S&P 500
SPX
gained 8.9% in November, its best month of 2023, and the 18th best-performing month of the past 73 years. And it has continued to climb in December, having risen 3.3% through Thursday’s close, according to FactSet data.

Earlier this week, options strategists warned that markets might run into trouble at 4,600 on the S&P 500. They warned that a “call wall” of open-interest in bullish contracts around that level could force market makers to put the breaks on the rally.

Instead, bullish traders blew through the call wall, pushing it higher to 4,700, said Kochuba.

The S&P 500 closed at 4,719.55 on Thursday, its highest close since Jan. 12, 2022, according to FactSet data. The index is now sitting within 1.75 percentage points of its record closing high of 4,796.56 on Jan. 3, 2022.

Traders’ bullishness recently helped push the Cboe Volatility Index
VIX,
otherwise known as Wall Street’s “fear gauge,” to multiyear lows, according to FactSet data.

To be sure, it isn’t just S&P 500 options and contracts tied to popular stocks like Tesla Inc.
TSLA,
+4.91%
seeing explosive volume: Calls tied to the iShares Russell 2000 ETF
IWM,
which tracks the small-cap Russell 2000, hit 1.35 million contracts, the third-highest ever, according to Goldman. Activity in options contracts linked to small-cap stock indexes has surged since late October.

Heavy call buying has pushed the put-call skew for S&P 500 options to its lowest level in a year, according to data from Goldman Sachs Group.

This shows that investors have been scrambling to buy bullish contracts, while largely shunning bearish ones, as stocks marched higher. Goldman analysts described Friday as “the last major liquidity event of the year” in a note to clients obtained by MarketWatch.

GOLDMAN SACHS

“Triple Witching” days happen once a quarter. They are thusly named because options tied to single stocks, ETFs and indexes will expire, alongside index-tracking futures contracts. Options-market experts say they are typically associated with more intraday swings and higher trading volume.

Making things even more interesting is the fact that the quarterly rebalancing of the S&P 500 and Nasdaq-100 is due to take effect after markets close on Friday.

Normally routine, this quarter’s rebalancing is drawing outsize attention following an extremely rare ad hoc rebalancing over the summer to rein in the influence of megacap stocks in the Nasdaq-100.

Earlier this month, Standard & Poor’s announced its rebalancing plans, which included reducing the weighting of two Magnificent Seven stocks, Apple Inc.
AAPL,
+0.08%
and Alphabet Inc.
GOOG,
-0.57%

GOOGL,
-0.48%.
At the same time, Amazon.com Inc.
AMZN,
-0.95%,
which is also part of the Mag 7, will see its weighting increased. Meanwhile, three companies will join the index, including Uber Inc.
UBER,
+0.86%,
while shares of three other companies depart.

Kochuba believes Friday’s expiration could remove the last barrier holding stocks back from rocketing to record highs before the end of the year.

“After OpEx, markets will be able to move more freely,” Kochuba said.

Garrett DeSimone of OptionMetrics cautioned that investors shouldn’t place too much weight on options-market activity and other technical factors.

“At the end of the day, macro trumps everything,” he said during an interview with MarketWatch.

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December 14, 2023
Dow Jones ekes out gain Friday, stocks mostly advance for the week as Israel-Gaza war escalates

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U.S. stocks closed mostly lower Friday, but the Dow Jones and S&P 500 posted weekly gains, as the Israel-Gaza war appeared to escalate heading into the weekend. The Dow Jones Industries
DJIA,
+0.12%
rose about 39 points, or 0.1%, on Friday, ending near 33,670, according to preliminary FactSet data. The S&P 500 index
SPX,
-0.50%
fell 0.5% and the Nasdaq Composite Index
COMP,
-1.23%
closed 1.2% lower. The S&P 500’s energy segment outperformed Friday, gaining 2.3%, as U.S. benchmark crude surged nearly 6% after Israel ordered more than a million people in Gaza to evacuate to the south. Treasury yields fell, with the 10-year Treasury
TMUBMUSD10Y,
4.626%
rate retreating to 4.628% Friday, snapping a 5-week yield climb, according to Dow Jones Market Data. Bond prices and yields move in the opposite direction. Investors bought other haven assets too, including gold
GC00,
+0.23%
and the U.S. dollar
DXY,
+0.07%.
Wall Street’s “fear gauge”
VIX,
+15.76%
also touched its highest level in more than a week. Even so, the Dow Jones booked at 0.8% weekly gain, the S&P 500 advanced 0.5% and the Nasdaq fell 0.2%.

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October 13, 2023
What the ‘mysterious shrinking’ of Wall Street’s fear gauge means for stocks, according to DataTrek

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Wall Street’s so-called fear gauge has been subdued this year, in a “mysterious shrinking” pattern, that’s a bullish signal for equities, according to DataTrek Research.

Declines for the Cboe Volatility Index
VIX
fear gauge come despite continued worries over inflation and elevated interest rates.

“We’ve been saying for several months that a low VIX is a sign that U.S. stocks are in a bull market rather than being excessively delusional about the obvious challenges ahead,” said Nicholas Colas, co-founder of DataTrek, in a note emailed Monday. “We still believe the next few weeks will be choppy, however.”

The gauge, known by its ticker VIX, has dropped more than 35% so far this year and is trading below its long-term average, according to FactSet data. Its trading levels are derived from options contracts tied to the S&P 500, the U.S. stock benchmark that has rallied 16% in 2023 through Monday.

Last week the VIX made “a new post-pandemic crisis low,” finishing below 13 on Sept. 14 in a “rare occurrence” for the index that was a positive sign for stocks over the next three months, Colas’s note shows. That’s even if it suggests near-term “choppiness” will continue, he said.

On Monday the VIX closed at 14, well below its long-run average of around 20. The measure ended Sept. 14 at 12.8.

“At first glance, this makes little sense,” Colas said. “The VIX is supposed to be Wall Street’s ‘Fear Index’ and it would appear “there’s plenty to be fearful of just now.”

‘Cloudy picture’

Colas cited several areas of concern, including uncertainty surrounding inflation, the recent jump in oil prices
CL00,
+1.08%
and “a cloudy picture” of how long the Fed Reserve will keep interest rates elevated, for his rationale as to why investor might feel fearful.

The Fed has been trying to slow the rise in the cost of living in the U.S. via its restrictive monetary policy, lifting its benchmark rate aggressively over the past 18 months.

There also has been the recent climb in Treasury rates that has weighed on stocks lately, with 10-year Treasury yields looking “set on making new decade-plus highs,” said Colas.

The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
finished Monday at 4.318%, according to Dow Jones Market Data. That’s around levels seen in late 2007, FactSet data show.

‘Seasonal peaks’ in volatility

The VIX had kicked off 2023 trading below its long-run average, with Colas saying in January that it was looking a lot more like 2021, a year in which stocks rallied, rather than 2022, when equities tanked as the Fed rapidly hiked rates.

See: Wall Street’s ‘fear gauge’ VIX shaping up more like 2021 than 2022, as U.S. stocks rally this year, says DataTrek

Meanwhile, September and October are known for “seasonal peaks in equity market volatility,” according to Colas.

U.S. stocks have slumped so far this month, after falling in August. The S&P 500, which dropped 1.8% last month, is down 1.2% in September through Monday, FactSet data show.

The S&P 500
SPX
closed 0.1% higher on Monday while the Nasdaq Composite
COMP
and Dow Jones Industrial Average
DJIA
each finished about flat, as investors digested fresh data showing a drop in confidence among homebuilders this month amid elevated mortgage rates.

Stock-market investors also have been monitoring the U.S. Treasury market’s inverted yield curve, or when shorter-term yields climb above long-term rates, as that historically has preceded a recession.

There’s also some concern over the increased popularity of zero-day options in the stock market, as “you’d think their growing usage would push anticipated volatility higher, not lower,” Colas said.

“We doubt options desks have just walked away from trading 30-day options” on S&P 500 futures, he said. “If there is money to be made in a financial asset, someone invariably trades it.”

The Cboe Volatility Index measures 30-day expected volatility of the U.S. stock market.

“What the ultra-low VIX is telling us is that none of these concerns matter enough to offset a fundamentally strong picture for U.S. corporate earnings and the belief that the Federal Reserve is largely done hiking rates,” said Colas. “Equities are dismissing the possibility of a recession over the next 1-2 years, no matter what an inverted yield curve has historically said on that point.”

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September 18, 2023
Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates

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The past six weeks have left investors with more questions than answers about the outlook for U.S. monetary policy and, by extension, financial markets.

And although the Federal Reserve is expected to leave its policy interest rates on hold Wednesday, Chairman Jerome Powell could still rattle markets as he’s probed for clues about the central bank’s thinking.

Powell’s statement is expected to hew to what he said at the Jackson Hole, Wyoming, symposium in August and before that, during the central bank’s July press conference, but market analysts say the question-and-answer session with reporters and the updated “dot plot” of policy makers projections for interest rates could potentially furnish market-moving news.

See: U.S. economy is trending in the Fed’s direction, so expect Powell to tread carefully next week

“Just because this meeting isn’t widely considered to be ‘in play’ doesn’t mean it is insignificant,” said Steve Sosnick, chief strategist at Interactive Brokers, during a phone interview with MarketWatch.

“The fact is, the Vix is relatively low. That indicates a very sanguine, if not complacent market. And a complacent market can sometimes be more susceptible to a negative shock.”

The Cboe Volatility Index
VIX,
better known as “the Vix” or Wall Street’s “fear gauge,” finished below 14 on Friday, even as the Nasdaq Composite
COMP
and S&P 500
SPX
logged back-to-back weekly losses. Markets have seesawed recently as inflation has reaccelerated while the U.S. labor market and broader economy have slowed.

What will investors be looking for, exactly? Presently, investors expect the Fed could start cutting interest rates again by the middle of next year. Anything that could disabuse them of this notion could undercut U.S. stocks while boosting Treasury yields and the U.S. dollar, analysts said.

Liz Ann Sonders, chief market strategist at Schwab, said clues could potentially surface during the Q&A at the post-meeting press conference, which often has more of an impact on markets than Powell’s statement.

“It is that 45 minutes to an hour that tends to be more market moving,” Sonders said during a phone interview with MarketWatch. “It is what they say about higher for longer and expectations around rate cuts in 2024, and whether Powell pushes back against that.”

Since the beginning of August, more data has emerged to suggest that the U.S. economy might finally be starting to respond to the pressure from the Federal Reserve’s most aggressive campaign of interest-rate hikes since the 1980s. Corporate and personal bankruptcies have climbed.

See: Bankruptcies spiked in August — the post-COVID rebound ‘is becoming a reality’

There have also been indications that the torrid postpandemic labor market might be starting to cool. The Labor Department’s monthly jobs report showed fewer than 200,000 jobs were created in August, while figures from the prior two months were also revised lower, and the unemployment rate ticked higher to 3.8%.

At the same time, consumer-price inflation has accelerated for two months in a row. Some on Wall Street have started to worry about stagflation, and financial markets are now pricing in about even odds that the Fed will leave interest rates on hold.

A report earlier this week showed consumer prices rose 3.7% over the 12 months through August, while the rise for the month was 0.6%, the biggest increase in 14 months.

Adding to the complicated picture, the resumption of student loan payments in October has revived concerns about the consumer despite relatively robust retail-sales data released earlier this week, while an auto worker strike involving all of the “Big Three” U.S. carmakers and the threat of a government shutdown are also sowing fears about a hit to the economy.

“The triple threat from the resumption of student loan payments, a government shutdown and a strike by auto union workers could significantly weigh on GDP growth in Q4,” said EY Chief Economist Gregory Daco in emailed commentary.

Powell could be asked to weigh in on any or all of these. He also could be asked to directly address investors’ expectations for the timing of the Fed’s initial rate cut of the cycle. Expectations for a policy pivot already proved premature last summer, which caused a brief but powerful bear-market rally to fizzle.

A repeat of this could again create problems for stocks, Sosnick said.

“Let’s see if the Fed agrees with the market’s assumptions about rate cuts,” he added.

Traders expect the central bank to keep interest rates on hold Wednesday, with market-based odds seeing a pause as a virtual certainty, according to the CME’s FedWatch tool, which measures expectations based on trading in Fed funds futures. Expectations for another hike later this year are roughly split.

See also: 4 things to watch for at next week’s Fed policy meeting

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September 17, 2023
Stocks are trapped in a trading range. Something’s got to give.

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The U.S. stock market, as measured by the S&P 500 Index SPX, is trapped in a trading range, and volatility seems to be damping down considerably. The significant edges of the trading range are support at 4330 and resistance at 4540. Both of those levels were touched in the latter half of August. A breakout from this range should give the market some strong directional momentum.

Since Labor Day, prices have hunkered down into an even narrower range. Typically, the latter half of September through the early part of October…

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September 14, 2023
Wall Street’s most bullish strategist warns of choppiness in stocks, still sees the S&P 500 touching a record high this year

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Recent weakness in the U.S. stock market is likely to persist over the near-term, according to Wall Street’s most bullish strategist, who still thinks the S&P 500 is on a path to a record high this year.

John Stoltzfus, chief investment strategist at Oppenheimer Asset Management Inc., in late July projected the S&P 500 would rise above 4,900 by the end of 2023. That is the highest price target for the large-cap index among 20 Wall Street firms surveyed by MarketWatch in August.

It implies the S&P 500 would rise above its earlier closing record high of 4,796 reached on Jan. 3, 2022 by the end of the year. The path up, however, could get bumpy.

“Bullishness [in the stock market] is relatively high while the Fed remains shy of its inflation target,” said a team of Oppenheimer strategists led by Stoltzfus in a Sunday note. They also said, “we persist in suggesting that investors curb their enthusiasm [in the stock market] for a long rate pause or even a rate cut and instead right-size expectations.”

Expectations that the Federal Reserve is nearing an end to its current interest-rate hiking cycle, as well as optimism around artificial intelligence boosted the U.S. stock market in the first seven months of 2023. However, the rally came to a brief halt in August as investors worried the Fed could be forced to keep rates elevated as a batch of stronger-than-expected economic data and rising oil prices fueled concerns that still-sticky inflation would mean that borrowing costs will stay higher for longer.

Investors should not brush off those pressures, even through the Fed appears to be nearing the end to its current rate-hike cycle, Stoltzfus and his team said. “The stickiness evidenced in food, services, energy and other prices warrants the Fed remaining vigilant along with a potential for one more hike this year and perhaps another next year,” they said.

See: When will consumers stop buying more stuff? It’s a key question for the stock market.

However, Stoltzfus doesn’t see current headwinds for stocks as something that would prevent the S&P 500 from achieving his team’s new peak target.

Stock-market investors expect this week’s August inflation report to offer more clarity on whether the central bank will continue to ratchet up its fight against inflation. The headline component of the consumer-price index is forecast to accelerate to 0.6% in August from July’s 0.2% gain, while the core measure that strips out volatile food and fuel costs is expected to rise a mild 0.2% from a month earlier, according to a survey of economists by The Wall Street Journal.

Meanwhile, a key Wall Street volatility index also pointed to “some choppiness” in the stock market in the near term to keep investors on their toes, said Stoltzfus. The CBOE Volatility Index
VIX,
at a level of 13.82 on Monday, hovered around its 12-month low and traded about 30% below its one-year average level of 19.9, and 37% below its two-year average of 21.88 (see chart below).

Stoltzfus and his team suggest that investors use market weakness to seek out “babies that get thrown out with the bath water” in periods of volatility. They said the S&P 500 Energy Sector
XX:SP500.10
looks increasingly attractive as policy makers in the U.S. and abroad strive to contain inflation and manage economic growth.

“We believe that prospects are looking better that the Fed’s success thus far in bringing down the rate of inflation could lead to a [rate] pause next year, thus lessening pressures on economic growth,” the strategists said. An improved economic growth, along with fiscal stimulus from investment in stateside infrastructure projects and stateside chip manufacturing efforts, could contribute to profitability in the energy sector into 2024, the team added.

The Energy Select Sector SPDR Fund
XLE,
which is seen as a proxy of the energy sector of the S&P 500, has advanced 3.9% year to date versus a 8.5% increase in the price of the U.S. benchmark West Texas Intermediate crude oil
CL00,
+0.03%

CL.1,
+0.03%,
according to FactSet data.

Oil futures
CLV23,
+0.03%
BRNX23,
-0.03%
traded at their highest levels of the year on Monday morning, a week after Russia and Saudi Arabia caught markets off guard with their output cut extension announcements, but they settled modestly lower on Monday afternoon.

See: Energy ETFs are outshining the S&P 500, but it’s not just because of the oil rally

Stoltzfus in late July projected the S&P 500
SPX
would rise above its record high by the end of 2023, lifting his year-end price target for the large-cap index to 4,900 from an earlier 4,400 projection from December. It implies a 9.2% advance from where the S&P 500 settled on Monday, at around 4,487.

See: S&P 500 has a new record high 2023 price target. Here’s a look at Wall Street’s official stock-market outlook.

U.S. stocks finished higher on Monday, boosted by technology shares as Nasdaq Composite
COMP
advanced 1.1%. The S&P 500 was up 0.7% and the Dow Jones Industrial Average
DJIA
ended 0.3% higher, according to FactSet data.

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September 11, 2023
What’s next for markets after aborted Wagner mutiny leaves Russia’s Putin weakened

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Investors will start the week nervously sorting through the aftermath of a short-lived rebellion by the mercenary Wagner Group that’s seen leaving Russian President Vladimir Putin weakened.

“As Monday’s global markets are set to begin trading, investors are laser-focused on whether the short-lived Russia insurrection was only the beginning of a much deeper thunderbolt set to rock geopolitical, economic and market stability in the days and weeks ahead,” Greg Bassuk, chief executive officer at AXS Investments in New York, told MarketWatch on Sunday in emailed comments.

U.S. stock-index futures edged up after the start of electronic trading Sunday night, while oil rallied. Futures on the Dow Jones Industrial Average
YM00,
+0.14%
rose 25 points, while S&P 500 futures
ES00,
+0.15%
edged up 0.1% and Nasdaq-100 futures gained 0.2%.

Global stocks fell last week as interest-rate hikes by European central banks stoked recession fears. In the U.S., the S&P 500
SPX,
-0.77%
ended a streak of five straight weekly gains, while the Dow Jones Industrial Average
DJIA,
-0.65%
and Nasdaq Composite
COMP,
-1.01%
also pulled back.

See: Russia’s short-lived revolt could have long-term consequences for Putin, as questions remain over Prigozhin’s whereabouts

‘Real cracks’

While a weakened Russia raises the prospects of a favorable outcome for Ukraine 16 months after Putin’s decision to invade, the potential for further internal strife in the nation with the world’s largest nuclear arsenal is less comforting, observers noted.

“This raises profound questions. It shows real cracks,” U.S. Secretary of State Antony Blinken told CBS News’ “Face the Nation” on Sunday morning.

Putin’s hold on power “certainly seems shakier than it was a few days ago,” but there remains “no clear contender to replace him, by election or coup,” said Benjamin Friedman, policy director at Defense Priorities, a foreign-policy think tank in Washington, D.C.

Nonetheless, the war in Ukraine “is weakening Russia in various ways, including by creating internal strife and dangerously discontented elites who have some power,” Friedman told MarketWatch. “The perception of Putin’s fallibility and weakness is growing and creates its own reality. That is dangerous to him. It’s hard to predict what additional power grabs and instability that could create,” he said.

See: Russia’s short-lived revolt could have long-term consequences for Putin, as questions remain over Prigozhin’s whereabouts

‘Bloodbath’ of volatility?

AXS Investment’s Bassuk said the further turmoil “could drive a bloodbath of market volatility amid its impact on the war with Ukraine, a shifting balance among the G-8 superpowers, and the already heightened potential for a U.S. and global recession.”

Analysts have warned that an uptick in volatility may be overdue. The Cboe Volatility Index
VIX,
+4.11%,
a measure of expected volatility in the S&P 500 over the next 30 days, last week fell to its lowest since January 2020 and ended Friday below 14. Its long-term average stands near 20. The subdued performance, which has accompanied a year-to-date rally of more than 13% for the S&P 500 index, is taken by some market watchers as a sign of complacency.

Read: Why the ‘easy money’ has been made in the stock-market rally — and what comes next

Potential ‘nonevent’

But the quick termination of the rebellion could make it more of a “nonevent” for capital markets as trading resumes, said Marc Chandler, managing director at Bannockburn Global Forex.

While conventional wisdom sees signs of Putin’s weakness, the Russian leader has often been underestimated, he said.

“The war in Ukraine is likely unaffected, and Kyiv’s counteroffense thus far seems rather muted. The risk is that the war escalates if Kyiv resorts to medium- and long-range missiles to hit Russian assets in Crimea, and possibly in Russia proper,” Chandler said.

The rebellion, led by Wagner Group chief Yevgeny Prigozhin, saw the mercenary paramilitary force take over Russia’s southern military headquarters in Rostov-on-Don amid little resistance before marching largely unchallenged toward Moscow. Putin, without mentioning him by name, accused Prigozhin of treason.

The advance halted a little more than 120 miles from the capital before Prigozhin abruptly stood down in a deal that would see him sent to Belarus and charges against him of leading an armed rebellion dropped.

As events unspooled Saturday, analysts warned that extended strife could spark a flight to quality when markets reopened into assets like U.S. Treasury bonds
TMUBMUSD10Y,
3.720%,
the U.S. dollar
DXY,
-0.14%
and other havens like the Japanese yen
USDJPY,
-0.21%,
Swiss franc
USDCHF,
-0.06%
and gold
GC00,
+0.32%.

The dollar was little changed versus major rivals in the early going Sunday evening, while gold for August delivery
GCQ23,
+0.32%
edged up 0.2%.

All eyes on oil

Meanwhile, commodity and financial markets have seen big swings since Russia invaded Ukraine on Feb. 24, 2022.

First and foremost, the invasion produced a global energy shock. Russia was the world’s third-largest crude producer behind the U.S. and Saudi Arabia, and a key supplier of natural gas to Western Europe.

Crude-oil futures soared in the immediate aftermath of the invasion, with the global benchmark Brent crude
BRN00,
+0.91%
topping out just shy of $140 a barrel in early March 2022 after closing at $94.05 on the eve of the invasion.

Natural-gas prices had also soared, and fears of shortages led to a scramble by European governments to fill storage amid apocalyptic predictions about a harsh 2022-’23 winter.

Energy prices subsequently fell back. Crude oil is trading well below levels seen ahead of the invasion. And despite waves of sanctions by European and U.S. governments and price caps aimed at limiting Moscow’s ability to fill its coffers, Russian crude supplies remain robust.

Oil prices were on the rise Sunday night, with WTI up 87 cents, or 1.3%, to trade at $70.03 a barrel, while Brent gained 91 cents, or 1.2%, to $74.76 a barrel.

August Brent crude
BRNQ23,
+0.95%
settled Friday at $73.85 a barrel, falling 3.6% last week. West Texas Intermediate crude for August delivery
CL00,
+0.91%,
the U.S. benchmark, dropped 3.9% last week to end Friday at $69.16 a barrel.

Jorge Leon, senior vice president at Rystad Energy, noted that in the past 35 years, geopolitical shocks involving big oil producers have seen crude futures jump by an average of 8% in the five days after the start of the triggering event (see chart below).

Rystad Energy

A rise of that magnitude looks unlikely given how quickly the rebellion was quelled, he said.

“Given that the short-lived event this weekend in Russia appears to have ended, we do not expect to see such a significant increase in oil prices next week. We do, however, believe that the geopolitical risk amid internal instability in Russia has increased,” Leon said in emailed comments.

—Barbara Kollmeyer contributed.

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June 25, 2023
What’s next for markets after aborted Wagner mutiny leaves Russia’s Putin weakened

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Investors will start the week nervously sorting through the aftermath of a short-lived rebellion by the mercenary Wagner Group that’s seen leaving Russian President Vladimir Putin weakened.

“As Monday’s global markets are set to begin trading, investors are laser-focused on whether the short-lived Russia insurrection was only the beginning of a much deeper thunderbolt set to rock geopolitical, economic and market stability in the days and weeks ahead,” Greg Bassuk, chief executive officer at AXS Investments in New York, told MarketWatch on Sunday in emailed comments.

U.S. stock-index futures edged up after the start of electronic trading Sunday night, while oil rallied. Futures on the Dow Jones Industrial Average
YM00,
+0.14%
rose 75 points, while S&P 500 futures
ES00,
+0.12%
edged up 0.2% and Nasdaq-100 futures gained 0.3%.

Global stocks fell last week as interest-rate hikes by European central banks stoked recession fears. In the U.S., the S&P 500
SPX,
-0.77%
ended a streak of five straight weekly gains, while the Dow Jones Industrial Average
DJIA,
-0.65%
and Nasdaq Composite
COMP,
-1.01%
also pulled back.

See: Russia’s short-lived revolt could have long-term consequences for Putin, as questions remain over Prigozhin’s whereabouts

‘Real cracks’

While a weakened Russia raises the prospects of a favorable outcome for Ukraine 16 months after Putin’s decision to invade, the potential for further internal strife in the nation with the world’s largest nuclear arsenal is less comforting, observers noted.

“This raises profound questions. It shows real cracks,” U.S. Secretary of State Antony Blinken told CBS News’ “Face the Nation” on Sunday morning.

Putin’s hold on power “certainly seems shakier than it was a few days ago,” but there remains “no clear contender to replace him, by election or coup,” said Benjamin Friedman, policy director at Defense Priorities, a foreign-policy think tank in Washington, D.C.

Nonetheless, the war in Ukraine “is weakening Russia in various ways, including by creating internal strife and dangerously discontented elites who have some power,” Friedman told MarketWatch. “The perception of Putin’s fallibility and weakness is growing and creates its own reality. That is dangerous to him. It’s hard to predict what additional power grabs and instability that could create,” he said.

See: Russia’s short-lived revolt could have long-term consequences for Putin, as questions remain over Prigozhin’s whereabouts

‘Bloodbath’ of volatility?

AXS Investments’ Bassuk said the further turmoil “could drive a bloodbath of market volatility amid its impact on the war with Ukraine, a shifting balance among the G-8 superpowers, and the already heightened potential for a U.S. and global recession.”

Analysts have warned that an uptick in volatility may be overdue. The Cboe Volatility Index
VIX,
+4.11%,
a measure of expected volatility in the S&P 500 over the next 30 days, last week fell to its lowest since January 2020 and ended Friday below 14. Its long-term average stands near 20. The subdued performance, which has accompanied a year-to-date rally of more than 13% for the S&P 500 index, is taken by some market watchers as a sign of complacency.

Read: Why the ‘easy money’ has been made in the stock-market rally — and what comes next

Potential ‘nonevent’

But the quick termination of the rebellion could make it more of a “nonevent” for capital markets as trading resumes, said Marc Chandler, managing director at Bannockburn Global Forex.

While conventional wisdom sees signs of Putin’s weakness, the Russian leader has often been underestimated, he said.

“The war in Ukraine is likely unaffected, and Kyiv’s counteroffense thus far seems rather muted. The risk is that the war escalates if Kyiv resorts to medium- and long-range missiles to hit Russian assets in Crimea, and possibly in Russia proper,” Chandler said.

The rebellion, led by Wagner Group chief Yevgeny Prigozhin, saw the mercenary paramilitary force take over Russia’s southern military headquarters in Rostov-on-Don amid little resistance before marching largely unchallenged toward Moscow. Putin, without mentioning him by name, accused Prigozhin of treason.

The advance halted a little more than 120 miles from the capital before Prigozhin abruptly stood down in a deal that would see him sent to Belarus and charges against him of leading an armed rebellion dropped.

As events unspooled Saturday, analysts warned that extended strife could spark a flight to quality when markets reopened into assets like U.S. Treasury bonds
TMUBMUSD10Y,
3.727%,
the U.S. dollar
DXY,
-0.11%
and other havens like the Japanese yen
USDJPY,
-0.19%,
Swiss franc
USDCHF,
-0.03%
and gold
GC00,
+0.18%.

The dollar was little changed versus major rivals in the early going Sunday evening, while gold for August delivery
GCQ23,
+0.18%
edged up 0.2%.

All eyes on oil

Meanwhile, commodity and financial markets have seen big swings since Russia invaded Ukraine on Feb. 24, 2022.

First and foremost, the invasion produced a global energy shock. Russia was the world’s third-largest crude producer behind the U.S. and Saudi Arabia, and a key supplier of natural gas to Western Europe.

Crude-oil futures soared in the immediate aftermath of the invasion, with the global benchmark Brent crude
BRN00,
+0.73%
topping out just shy of $140 a barrel in early March 2022 after closing at $94.05 on the eve of the invasion.

Natural-gas prices had also soared, and fears of shortages led to a scramble by European governments to fill storage amid apocalyptic predictions about a harsh 2022-’23 winter.

Energy prices subsequently fell back. Crude oil is trading well below levels seen ahead of the invasion. And despite waves of sanctions by European and U.S. governments and price caps aimed at limiting Moscow’s ability to fill its coffers, Russian crude supplies remain robust.

Oil prices were on the rise Sunday night, with WTI up 87 cents, or 1.3%, to trade at $70.03 a barrel, while Brent gained 91 cents, or 1.2%, to $74.76 a barrel.

August Brent crude
BRNQ23,
+0.80%
settled Friday at $73.85 a barrel, falling 3.6% last week. West Texas Intermediate crude for August delivery
CL00,
+0.69%,
the U.S. benchmark, dropped 3.9% last week to end Friday at $69.16 a barrel.

Jorge Leon, senior vice president at Rystad Energy, noted that in the past 35 years, geopolitical shocks involving big oil producers have seen crude futures jump by an average of 8% in the five days after the start of the triggering event (see chart below).

Rystad Energy

A rise of that magnitude looks unlikely given how quickly the rebellion was quelled, he said.

“Given that the short-lived event this weekend in Russia appears to have ended, we do not expect to see such a significant increase in oil prices next week. We do, however, believe that the geopolitical risk amid internal instability in Russia has increased,” Leon said in emailed comments.

—Barbara Kollmeyer contributed.

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June 25, 2023
How a hawkish Fed could kill a baby bull-market rally in U.S. stocks

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It is the notion that the Federal Reserve could deliver a hawkish jolt to markets even if it refrains from raising rates when its two-day policy meeting ends on Wednesday.

There are concerns that such an outcome could spark a turnaround in U.S. stocks, especially if an uncomfortably strong reading on May inflation — due this coming Tuesday just as the Fed’s policy meeting is slated to begin — pushes the central bank toward something even more extreme, like delivering a rate increase on Wednesday despite intimating that it plans to abstain.

The May consumer-price index is forecast to rise 4.0% for the year, down from a rise of 4.9%, while the core index, excluding food and energy prices, is seen easing to a rise of 5.3% from 5.5%.

On the other hand, signs that the economy has weakened and inflation has continued to fade would help the Fed to justify skipping a rate increase in June — as several senior officials have suggested it will — while signaling that a potential hike at its following meeting in July could be the final increase for the cycle.

“Softening U.S. data should support calls that a June skip could eventually turn into a July pause. Next week, most of the data is expected to remain weak or little changed: retail sales could be flat m/m, the Fed regional surveys should remain in negative territory, and consumer sentiment will waver,” said Craig Erlam, senior market analyst at OANDA, in emailed commentary.

See: The Fed’s crystal ball on inflation appears off the mark again. Here’s comes another fix.

Wednesday’s meeting comes at a critical time for the market. U.S. stocks have powered ahead for more than six months, with the S&P 500
SPX,
+0.11%
having risen more than 20% off its Oct. 12 closing low, according to FactSet. Just this past week, the index exited bear-market territory for the first time in a year.

The index is up 12% so far in 2023, reversing some of its 19.4% decline from 2022, its biggest calendar-year drop since 2008, according to Dow Jones Market Data.

So far this year, highflying tech stocks have helped to paper over weakness in other areas of the market. This has started to change over the past two weeks, as small-cap and value-stocks have lurched suddenly higher, but there are fears that the Fed could hurt the most interest-rate sensitive technology names if Chairman Jerome Powell hints at rates rising higher than investors presently anticipate.

The so-called “Megacap eight” stocks — a group that includes both classes of Alphabet Inc. stock
GOOG,
+0.16%

GOOGL,
+0.07%,
Microsoft Corp.
MSFT,
+0.47%,
Tesla Inc.
TSLA,
+4.06%,
Microsoft Corp.
MSFT,
+0.47%,
Netflix Inc.
NFLX,
+2.60%,
Nvidia Corp.
NVDA,
+0.68%,
Meta Platforms Inc.
META,
+0.14%
— have driven nearly all of the S&P 500’s gains this year, according to Ed Yardeni, president of Yardeni Research, who included his analysis in a note to clients.

But since the beginning of June, the Russell 2000
RUT,
-0.80%,
a gauge of small-cap stocks in the U.S., has risen more than 6.6%, according to FactSet data. The Russell 1000 Value Index
RLV,
-0.15%
has also gained nearly 3.7% in that time. During this period, both have outperformed the tech-heavy Nasdaq Composite
COMP,
+0.16%,
although the Nasdaq remains the market leader, having risen 26.7% since Jan. 1.

Concerns about the Fed’s plans intensified this week after the Bank of Canada delivered a surprise interest-rate hike, ending a four-month pause. The BOC’s decision followed a similar move by the Reserve Bank of Australia, and partly as a result, U.S. Treasury yields rose and tech-heavy stocks tumbled, with the Nasdaq logging its biggest drop since April 25, according to FactSet.

While small-caps held up amid the chaos, the reaction stoked fears that something similar might be in store for markets when the Fed delivers its latest decision on interest rates Wednesday.

Consequences of a ‘hawkish pause’

Stocks could be in for more turbulence if the Fed signals it plans to follow the BOC and RBA with a hawkish surprise of its own. And it wouldn’t necessarily need to hike rates to pull this off, market strategists said.

Emerging signs of complacency in the market could complicate its reaction. That the Cboe Volatility Index has fallen back below 15
VIX,
+1.32%
for the first time since before the arrival of COVID-19 is one such sign that investors aren’t worried enough about a potential selloff, said Miller Tabak + Co.’s Chief Market Strategist Matt Maley.

Another analyst likened the potential fallout from a hawkish Fed to the bad old days of 2022.

“If the Fed signals that rates will be going up again, the market playbook could read more like 2022 than what we have seen so far in 2023,” said Will Rhind, the founder and CEO of GraniteShares, during a phone interview with MarketWatch.

Perhaps the biggest wild card is Tuesday’s inflation report. If the numbers come in hot, Powell and his peers could face pressure to hike rates without priming the market first.

For this reason, Rhind believes investors are underestimating the likelihood of a hike next week, even as Fed funds futures currently see a roughly 70% probability that the central bank will stand pat, according to the CME’s FedWatch tool.

And Rhind isn’t the only one. Leslie Falconio, chief investment officer at UBS Global Wealth Management, says the Tuesday inflation report could be a make-or-break moment for markets, summing up fears expressed elsewhere on Wall Street in a recent note to clients.

“We believe another rate increase is on the table, and that the CPI release on 13 June, a day before the Fed decision, will be decisive. In our view, another hike won’t have a material impact on the pace of economic growth,” Falconio said.

What should investors watch out for?

Assuming the Fed does forego a hike in June, there are a few key tells that investors should watch for to determine whether a “hawkish pause” is under way.

Perhaps the most important will be how the Fed handles changes to its closely watched “dot plot.” A modestly higher median dot would send an unmistakable signal to the market that the Fed will continue with its campaign of tightening monetary policy, perhaps to the detriment of the market, said Patrick Saner, head of macro strategy at the Swiss Re Institute.

“If the Fed skips but wanted to avoid the impression of the hiking cycle being done, it would need to include a revision of the dot plot. They could justify that with a more resilient GDP forecast and a higher inflation outlook. So I think it is the dots and then the statement that will be in focus,” Saner said during a phone interview with MarketWatch.

Beyond that, whatever the Fed does or says will likely be viewed through the lens of economic data that is due out next week. In addition to the Tuesday inflation report, a report on May retail sales is due out Thursday, and a on consumer sentiment from the University of Michigan will land on Friday. All these data points could influence investors’ impressions of the state of the U.S. economy, and their expectations for how the Fed will behave as a result.

See also: Puzzled by the ebb and flow of recession worries? Then the MarketWatch weekly recession worry gauge is for you.

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June 11, 2023
‘Sell’ signals are flashing across the stock market now. But bulls still have one chance.

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The stock market, as measured by the S&P 500 Index SPX, has struggled to maintain the rally that began in mid-March, and now we are getting new sell signals from some of our internal indicators.

SPX was turned back by resistance near 4200 for the third time since last August. That is an extremely strong resistance area now. Moreover, there is further resistance at 4300. On the downside for SPX, there is technically support at 3970, where the small gaps exist on the SPX chart. A close below 3950 would be extremely bearish and…

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April 27, 2023
4 signs stocks are headed for a punishing selloff, as even strong performers look vulnerable

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U.S. stocks just touched their highest levels in two months. Yet, signs of a looming selloff are piling up, according to Jonathan Krinsky, chief technical strategist at BTIG.

The S&P 500
SPX,
+0.33%
and Russell 3000
RUA,
+0.40%
are both trading just shy of their highs from mid-February, but market breadth hasn’t recovered, as index gains over the past month have largely relied on megacap names like Microsoft Corp.
MSFT,
+0.93%
and Apple Inc.
AAPL,
+0.01%
helping to offset weakness in other areas of the market.

As of Friday, only 45% of Russell 3000 stocks were trading above their 200-day moving averages, according to data cited by Krinsky. By comparison, when the broad-market gauge was trading at its highest level of 2023 back in February, 70% of the individual stocks included in the index were trading above their 200-day moving average. Technical analysts use moving averages as a gauge of a stock or index’s momentum.

BTIG

Lackluster breath is looking like more of an issue analysts say, especially now that the Nasdaq’s outperformance appears to be fading after leading markets higher since the start of the year.

Over the last two weeks, the Dow Jones Industrial Average
DJIA,
+0.30%
has outperformed the Nasdaq Composite
COMP,
+0.28%
by the widest margin since the two-week period ending Dec 30, according to FactSet data.

Krinsky cited exchange-traded funds that feature megacap technology names, including the iShares Expanded Tech-Software ETF
IGV,
+0.45%,
the Communications Services Select Sector SPDR Fund ETF
XLC,
-0.57%
and Consumer Discretionary Select Sector SPDR Fund ETF
XLY,
+0.71%,
as examples of emerging weakness in this critical sector of the market. Meanwhile, regional bank stocks, small-cap stocks and shares of retailers, all of which have lagged behind the market this year, look weak.

See: Are tech stocks becoming a haven again? ‘It is a mistake,’ say market analysts.

Krinsky summed up this dynamic thus: “The weak parts of the market remain weak, while the strong parts now appear vulnerable,” the BTIG analyst said in a Sunday note to clients.

Furthermore, “[i]n absolute and relative terms, the tech sector looks like a poor risk/reward to us here,” Krinsky added.

Low implied volatility is another issue for markets, Krinsky said. That can mean investors have gotten too complacent and markets may be heading for a selloff, analysts say.

The Cboe Volatility Index
VIX,
-0.41%,
otherwise known as Wall Street’s “fear gauge,” finished Friday at its lowest end-of-day level since Jan. 4, according to Dow Jones Market Data. The Cboe S&P 500 9-Day Volatility Index, which tracks implied volatility over a shorter time horizon, has also fallen to January lows, FactSet data show.

Such low levels mean volatility could be poised to “mean revert,” Krinsky said, which may portend a selloff in the months ahead for the S&P 500, the most liquid and most closely watched gauge of U.S. stock-market performance.

Implied volatility gauges measure activity in option contracts linked to the S&P 500 to gauge how volatile traders expect markets to be over the coming days and weeks. Typically, implied volatility advances when U.S. stocks are falling.

The greenback has shown some signs of life in recent sessions, although the U.S. dollar remains well below the multi decade highs it reached back in September. That the buck bounced off its February lows late last week suggests that momentum could be skewed toward the upside for the dollar, Krinsky said, which could create more problems for stocks given the dollar’s tendency to weigh on markets during 2022.

The ICE U.S. Dollar Index
DXY,
-0.43%,
a gauge of the dollar’s strength measured against a basket of rivals, was up 0.7% in recent trade at 102.22.

All of these factors support the notion that stocks could be headed for what Krinsky called the “reverse October playbook.”

BTIG

Just as the S&P 500 bottomed following the hotter-than-expected September report on consumer-price inflation, the market’s monthslong rebound rally may have peaked following last week’s CPI report for March, which showed consumer prices rose a scant 0.1% last month, less than the 0.2% increase that had been forecast by economists polled by MarketWatch.

Not everybody agrees with this assessment. Marko Papic, chief strategist at Clocktower Group, cited market data going back to 1934 to show that U.S. stocks tend to rally after inflation peaks. Consumer-price inflation reached its highest level in more than four decades when the CPI headline number showed prices up 9.1% year-over-year in June.

CLOCKTOWER GROUP

U.S. stocks look set to decline for a second day in a row on Monday, with the S&P 500 off 0.3% at 4,126, while the Nasdaq Composite was down by 0.4% at 12,070, and the Dow Jones Industrial Average traded marginally lower at 33,881.

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April 17, 2023
This signal for U.S. stocks bodes well for a rally as some stability returns to the banking sector

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The U.S. stock market has been flashing an important signal that suggests concerns about the banking sector have dissipated after the sudden collapse of Silicon Valley Bank earlier in March.

The Cboe Volatility Index
VIX,
-1.68%,
a gauge of expected volatility in the S&P 500 index, dropped below the 20 level last week for the first time since March 8, suggesting a return to a lower risk environment that prevailed before Silicon Valley Bank first announced it had to sell securities to strengthen its deteriorating financial position.

The index, often referred to as Wall Street’s “fear gauge,” was down 1.7% at 18.70 on Friday after rising above 30 on March 13, the first trading day after regulators announced emergency measures to stem fallout from Silicon Valley Bank’s failure.

“It’s not a normal volatility environment,” said Johan Grahn, head ETF market strategist at AllianzIM. “We’ve spent 95% of trading days in the past 12 months above 20, while we were above 20 only 15% of the time in the 8-year period before the pandemic-driven volatility started in February of 2020.”

He also noted the VIX topped 30 in one of five days over the past 12 months on average, but only one in 100 days over the same 8-year period before the pandemic.

“Now we’re living in those periods as if it’s normal, but it’s not normal based on that history,” Grahn said.

Other market analysts also said investors should beware of what comes next.

Interest rate cuts in 2023 could signal a tanking economy

The three major U.S. stock indexes ended the month on a positive note with the S&P 500
SPX,
+1.44%
gaining 3.5% and the Dow Jones Industrial Average
DJIA,
+1.26%
up 1.9%, according to Dow Jones Market Data. The Nasdaq Composite
COMP,
+1.74%
advanced 6.7% as volatility in banking-sector stocks ignited a rush into the technology sector.

See: Are tech stocks becoming a haven again? ‘It’s a mistake,’ say market analysts.

For the quarter, the Nasdaq Composite rose 16.8%, its best quarterly gain since at least the fourth quarter of 2020, according to Dow Jones Market Data. The S&P 500, meanwhile, rose 7%, and the Dow advanced 0.4% in the first three months of 2023.

“Those worst fears have been taken off the table, at least for the time being. I think you’re just seeing a reflection in the markets of that fact,” Grahn told MarketWatch via phone.

“Fed Chairman Jerome Powell came out and started flexing his dovish wings a little bit by taking the banking issues into consideration and now leading the market to believe that maybe he will slow down what previously was communicated as more aggressive rate increases,” he said.

Stress in the banking sector and a possible credit squeeze has led markets to reprice expectations of future monetary tightening by the Federal Reserve. Traders’ bets are tilted toward a pause in interest rate increases in May, with odds of a 25-basis-point increase at 49%, according to CME FedWatch tool.

However, Grahn thinks if investors expect rate cuts will happen later this year, that could suggest the economy will tank “very soon” and in a “very painful way.”

Investors are effectively saying “there will be so much pain coming through the system so that the Fed cannot make an argument that holds water for why they want to keep the rates high,” said Grahn. “The risk sensitivity between what the market is pricing in terms of rate increases and where the Fed is telling the market that they’re going to be is way too wide. And the way that the market can be right is if we have a disastrous couple of months ahead of us.”

See: 2023 has been bad for the bears. Here are 5 reasons why it’s going to get even worse.

Liquidity spigot, back on

David Waddell, CEO and chief investment strategist at Waddell & Associates, said it has been past bailout reassurances that have stabilized financial markets, because they neutralize the threat of banking stress.

“Once the Fed turned on the ‘liquidity spigot’ and softened their rhetoric, the market took off, because while crises may destroy investor capital, bailouts create even more,” Waddell told MarketWatch in a phone interview.

It also bolsters the case for a shallow recession, he said, because the Fed has shown a tendency to over medicate. “The ‘patient’ will be fine,” Waddell said.

After Silicon Valley Bank failed earlier this month, U.S. Treasury Secretary Janet Yellen ruled out a return to broadscale federal bailouts for banks and emphasized the situation was very different from the 2008 financial crisis, which resulted in unprecedented measures to rescue the nation’s biggest banks.

See: Two-year Treasury yields sees biggest monthly drop since 2008 after bank turmoil

Big moves in Treasurys

U.S. Treasury yields tumbled in March with two-year rates
TMUBMUSD02Y,
4.101%
posting their biggest monthly yield drop since January 2008. The yield on the two-year Treasury note traded at 4.06% on Friday, down 73.5 basis points in March, according to Dow Jones Market Data.

“So far, equities are holding up and economic data has not materially faltered, but I can say with confidence that moves of this magnitude in the Treasury market are not typically signals of smooth sailing ahead,” said Liz Young, head of investment strategy at SoFi.

The ICE BofA MOVE Index, which measures the implied volatility of the U.S. Treasury markets rallied to 198.71 in mid-March, its highest level since 2008, according to FactSet data.

“At the very least, they’re indicating that the uncertainty around Fed policy has risen. Not only due to the recent fears in the banking system — but to the unclear end to the Fed’s hiking cycle.”

Earnings reports, March jobs data ahead

Waddell said investors shouldn’t rely too heavily on a few week’s gains in U.S. stocks, but thinks market sentiment could improve in April due to surprise in the “resilience of earnings and the robustness of them in the recovery.”

However, John Butters, senior earnings analyst at FactSet, said there has been larger cuts than average to EPS estimates for S&P 500 companies for the first quarter of 2023, given the continuing concerns in the market about bank liquidity and a possible broader economic recession.

The estimated earnings decline for the index is 6.6% for the quarter. If that is the actual decline, it will mark the largest earnings decline reported by the index since the second quarter of 2020, Butters said in a Friday note.

Several Federal Reserve speakers are on deck for next week, but the other big thing to watch will be the monthly jobs report for March from the U.S. Labor Department on Friday.

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April 2, 2023
Dow closes up more than 100 points as earnings season begins, stocks book best week of gains in 2 months
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U.S. stocks finished higher Friday, as investors weighed a flurry of bank earnings results for the fourth quarter and fresh data on consumer sentiment and inflation expectations.

All three major benchmarks also booked their best weekly percentage gains since Nov. 11, according to Dow Jones Market Data.
How stock indexes traded

The Dow Jones Industrial Average
DJIA,
+0.33%
rose 112.64 points, or 0.3%, to close at 34,302.61.

The S&P 500
SPX,
+0.40%
added 15.92 points, or 0.4%, to finish at 3,999.09.

The Nasdaq Composite
COMP,
-1.10%
gained 78.05 points, or 0.7%, to end at 11,079.16.

For the week, the Dow rose 2%, the S&P 500 advanced 2.7% and the Nasdaq gained 4.8% gain.

Read: Goldman Sachs sees these ‘prospective’ total returns across assets in 2023

What drove markets

Major stock indexes posted their best week of gains in two months on Friday after companies began reporting their fourth-quarter results, with big banks kicking off the earnings season.

No big surprises have come from the banks’ earnings results so far, with Bank of America Corp. and JPMorgan Chase & Co. indicating a potentially mild recession this year, according to Anthony Saglimbene, chief market strategist at Ameriprise Financial.

“I think the base case for most of the market right now is that we’re going to see a mild recession,” Saglimbene said in a phone interview Friday. “I don’t think anything that was said across bank earnings today surprised investors.”

Typically, the release of megabank earnings marks the unofficial start of the U.S. earnings reporting season, and market analysts will be watching closely this quarter for indications of how America’s largest companies are bracing for an expected economic downturn driven by higher interest rates.

JPMorgan
JPM,
+2.52%,
Bank of America
BAC,
+2.20%,
Wells Fargo & Co.
WFC,
+3.25%
and Citigroup
C,
+1.69%
were among banks that reported their fourth-quarter earnings Friday. JPMorgan was the top performer in the Dow Jones Industrial Average, with its shares closing 2.5% higher, FactSet data show.

Read: JPMorgan, Wells Fargo, Bank of America and Citi beat earnings expectations, but worries about ‘headwinds’ remain

Earnings will continue to be a “big focus” for markets this month, according to Saglimbene. “Analysts took down estimates pretty aggressively in the fourth quarter,” he said. “So the bar is pretty low for companies. We’ll see if they can hurdle past that.”

In U.S. economic data released Friday, the University of Michigan consumer sentiment index climbed in January to its highest level in nine months, as expectations for the rate of inflation one year out moderated.

“Signs that inflation has peaked and is moderating slowly kind of eases some of the anxiety that we’re going to see runaway inflation this year,” said Saglimbene.

A reading from the consumer-price index on Thursday showed U.S. inflation fell in December. Many investors are expecting that the Federal Reserve will slow its pace of interest rate hikes this year as the cost of living has cooled.

Read: Inflation slows again and clears path for slower Fed rate hikes

Stocks on Thursday pushed higher after St. Louis Federal Reserve Bank President James Bullard said the probability of a soft landing for the economy has increased due to “encouraging” inflation data.

Read: Why the stock market isn’t impressed with the first monthly decline in consumer prices in more than 2 years

Steve Sosnick, chief strategist at Interactive Brokers, said by phone Friday that he still favors consumer-staples stocks and companies with “more steady streams than more cyclical streams” of income. “If you’re looking at an economy that’s likely to slow down, it’s really hard for me to think that somehow ‘the cyclicals’ will be immune from the economic cycle,” he said.

Read: Why earnings season could be a ‘market-moving event’

Companies in focus

JPMorgan
JPM,
+2.52%
shares gained 2.5% after reporting fourth-quarter earnings and revenue before the bell that topped Wall Street expectations. The bank said a mild recession is now the “central case.”

Wells Fargo
WFC,
+3.25%
shares rose 3.3% after reporting falling profits, as it was hit by a recent settlement and the need to build reserves.

Bank of America
BAC,
+2.20%
shares gained 2.2% after reporting earnings per share of 85 cents last quarter, above the 77 cents a share expected by analysts. Revenue also beat expectations. However, the bank’s net interest income fell slightly below expectations despite jumping interest rates.

Delta Air Lines Inc.
DAL,
-3.54%
reported fourth-quarter profit and revenue before the bell that beat expectations. Shares of the airline fell 3.5%.

Tesla Inc.
TSLA,
-0.94%
shares fell after the company cut prices in the U.S. and Europe again, according to listings on the company’s website Thursday night. Tesla finished down 0.9%.

Shares of UnitedHealth Group Inc.
UNH,
-1.23%
dropped 1.2% after the health-insurance giant shared its results.

BlackRock Inc.
BLK,
+0.00%
shares closed about flat after the asset-management giant reported a decline in fourth-quarter results.

—Barbara Kollmeyer contributed to this article.
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January 13, 2023
Did 2022 break Wall Street’s ‘fear gauge’? Why the VIX no longer reflects the sorry state of the stock market

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U.S. stocks are about to cap off their worst year since 2008. But investors wouldn’t know it by glancing at what’s often referred to as Wall Street’s favorite fear gauge, which has recently failed to reach new heights as stocks tumbled to fresh lows.

The Cboe Volatility Index
VIX,
-3.16%,
better known as the VIX, is on track to finish 2022 not far off its long-term average despite widespread pain across markets. The VIX, based on trading in S&P 500 index options, serves as an indicator of expected volatility in the index over the coming 30-day period.

After topping out at 36.45 on March 7, it repeatedly failed to make new highs for the year, according to data from FactSet, even as stocks tumbled to their lowest levels in years in June and again in September and October.

Nicholas Colas, co-founder of DataTrek Research, highlighted the phenomenon in several research notes to his clients this year.

Not only is the S&P 500 on track to finish the year down roughly 20%, 2022 has also been the most consistently choppy year for stocks in more than a decade by at least one measure.

The index has recorded 46 moves of 2% in either direction since the start of the year, the most since 2009, according to Dow Jones Market Data — narrowly surpassing the number from 2020. That’s roughly four times the 10-year average of 11.3 per year.

The VIX fell 3% on Thursday to 21.46 in afternoon trading as the S&P 500
SPX,
+1.75%,
Dow Jones Industrial Average DJIA and Nasdaq Composite COMP all headed for daily gains after the Nasdaq booked its lowest closing level of the year on Wednesday.

A ‘really terrible year’

Perhaps counterintuitively, Colas and others see the subdued VIX as a potential cause for concern. This is because a spike in the fear gauge has typically preceded stock-market bottoms in recent decades.

Colas and others refer to the phenomenon as “capitulation,” meaning that a surge in the VIX means that sentiment in the market has grown so dire that the beginning of a market turnaround is likely at hand.

The VIX surged above 80 before stocks bottomed out in March 2009, and again in March 2020. Colas has said in the past that levels above 40 are needed to signal that capitulation is at hand. Volatility typically rises fastest when stocks are falling, market strategists said.

The lack of a clear signal that bears are reaching a point of exhaustion has made some analysts wonder if the market’s lows might still lie ahead.

See: Wall Street’s ‘fear gauge’ still not signaling stock-market bottom is near, analysts say

“Volatility seems too low,” said Danny Kirsch, head of the options desk at Piper Sandler, during a phone interview with MarketWatch this week. “I’d say the VIX should be in its mid-to-high 20s, as opposed to barely 20.”

“We had a really terrible year. There was massive wealth destruction, and yet the cost to hedge going forward hasn’t really changed,” Kirsch added.

Is the VIX ‘broken’?

Comparing the VIX’s 2022 performance to 2008 recently led Michael Kramer, founder of Mott Capital, to conclude that the gauge may be “broken” in a tweet published on Wednesday.

Others have pushed back against this notion, arguing that while the VIX has been “somewhat low,” it’s still elevated compared with recent market history.

To wit, the VIX’s current level is still more than twice its record low from Nov. 3, 2017, when the volatility gauge closed at 9.14, according to data from FactSet. This occurred at a time when U.S. stocks were drifting consistently higher. The S&P 500 went on to finish 2017 with a gain of more than 20%.

“It’s been a high VIX year, just not as high as some people think it should have been, given volatility elsewhere in markets,” said Rocky Fishman, the head of index volatility research at Goldman Sachs Group Inc.

The VIX has also maintained its strong inverse correlation to the S&P 500, as Callie Cox, a U.S. equity analyst at eToro, pointed out. Data shared by Cox showed that the VIX has moved inversely with the S&P 500
SPX,
+1.75%
roughly 80% of the time since its inception in 1990.

Why so low?

So, why has the VIX been so subdued? Cox, Kirsch and others rattled off several factors that might be contributing to its malaise.

One popular explanation is that as institutional investors dumped stocks and shifted more of their portfolios to cash this year, they were left with smaller levels of long-equity exposure in need of hedging.

“VIX is basically a measure of demand for hedges by the biggest investors in the market. But when institutional investors are liquidating their equity positions, they no longer have a need for the associated hedges, so they unwind those positions in the derivatives markets and ultimately that pressures” the VIX, said analysts at Sevens Report Research in a note entitled “Is the VIX broken?” published earlier this month.

Also, a generally bearish outlook for markets means that institutional investors are “fairly well hedged,” Kirsch said, which helps keep a lid on the VIX when large selloffs materialize.

Others cited traders’ increasing reliance on short-term options for tactical trades.

While the VIX is designed to interpret increased options buying as a sign that investors are growing more anxious, it specifically incorporates only options with roughly one month left until expiration.

This has become an issue as trading in shorter-dated options, including contracts with less than one day left until they expire, has surged in popularity this year, according to data from Goldman Sachs.

Trading in zero-day to expiration S&P 500 options has surged in the fourth quarter to more than four times its average level from 2021, according to data shared by Goldman in a research note dated Dec. 15.

“The VIX doesn’t accurately measure fear these days because there’s so much trading in short-dated options,” said Steve Sosnick, chief strategist at Interactive Brokers.

Is a blowup looming?

The question for investors now is whether a subdued VIX might lead to a volatility-inspired reckoning for markets, like what happened in February 2018, when a popular short-volatility trade rapidly unwound, contributing to the death of short-volatility products like the VelocityShares Daily Inverse VIX Short Term ETN.

It’s possible that markets could undergo a volatility-driven “washout” as some of the trades helping to suppress the VIX are unwound, Kirsch said. Although he doesn’t expect the impact on markets to be as severe as it was in 2018 or 2020, he told MarketWatch.

But whatever happens, it’s possible analysts who rely on the VIX to inform their trading might need to adjust their expectations around what constitutes a capitulation signal, Cox told MarketWatch. Still, this doesn’t necessarily mean that the VIX is “broken.”

“It’s still measuring what it’s intended to measure,” she said. “This is more a story of how much the options market has evolved over the past few years.”

“People just aren’t using classic one-month options to hedge or speculate as much. Investors are choosing to get more precise with their options strategies, which makes a lot of sense — it’s cheaper and more adaptable,” Cox added.

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December 29, 2022
If you think a Santa Claus rally is coming to the stock market, this is how to play it

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The benchmark S&P 500 Index has finally fallen below the 3900- to 4100-point trading range.

The move prompted an immediate reaction down to 3800, the next support level. (To see my suggestion for a so-called Santa Claus rally, please see the next item, below.)

Frankly, I would have expected more selling after the S&P 500
SPX,
-2.32%
broke a support level of that magnitude (perhaps a move to 3700).

So, 3700 is the next support level, and then there is support at the yearly lows near 3500. On the upside, there is now resistance in the 3900-3940 area.

The larger picture is that SPX is still in a downtrend, and that the last rally failed in early December right at the downtrend line that defines this bear market. The declining 200-day moving average (MA) was also in that same area, near 4100.

We are closing our positions in the McMillan Volatility Band (MVB) buy signal that occurred in early October, and we will now wait for a new signal to set up. If SPX were to close below the lower -4σ Band (currently at 3760 and declining), that would be the first step toward a new buy signal. That does not appear to be imminent.

Equity-only put-call ratios continue to rise and, thus, remain on sell signals. There has been some relatively heavy put buying in stock options over the past few weeks, and that has been a major contributing factor in the rise in the put-call ratios. These ratios are rather high on their charts, so they are considered to be in oversold territory. However, “oversold” does not mean “buy.”

After the market broke below 3900, breadth was poor for the next two days. That pushed the breadth oscillators — which were already on sell signals dating back to December 5^th — into oversold territory. We are now watching to see if they can generate buy signals. In fact, the NYSE breadth oscillator did generate a buy signal as of December 21^st, but the “stocks only” oscillator has not. We generally require that any signal from this indicator (which is subject to whipsaws) persist for at least two consecutive days before considering it to be an actionable signal.

New 52-week highs on the New York Stock Exchange have lagged for some time again, and thus the “new highs vs. new lows” indicator remains on a sell signal.

So, the above indicators are relatively negative, but that is contrasted by the CBOE Volatility Index
VIX,
+15.50%
indicators, which are more bullish. The VIX “spike peak” buy signal of December 13^th remains in place. Moreover, the trend of VIX buy signal, which is a more intermediate-term signal, remains in place. VIX would have to rise above 26 to cancel out these buy signals.

The construct of volatility derivatives remains bullish. That is, the term structures of the VIX futures and of the CBOE Volatility Indices slope upward. Moreover, the VIX futures are all trading at a premium to VIX. January VIX futures are now the front month, so we are watching for a warning sign, which would come if Jan VIX futures rose above the price of Feb VIX futures. That is not in danger of happening at this time.

The seasonal patterns that supposedly “rule” between Thanskgiving and the beginning of the new trading year have not worked out this year. The last of those patterns is yet to come, though — the Santa Claus rally — and it may still be able to salvage something for the bulls.

In summary, we continue to maintain a “core” bearish position and will continue to do so as long as SPX is in a downtrend. We will trade confirmed signals from our other indicators around that “core” position.

New recommendation: Santa Claus rally

The Santa Claus rally is a term and market seasonal pattern defined by Yale Hirsch over 60 years ago. It has a strong track record. The system is simple: The market rises over the last five trading days of one year and the first two trading days of the next year — a seven-day period.

This year the system begins at the close of trading on Thursday, December 22^nd (today). However, if that period does not produce a gain by SPX, that would be a further negative for stocks going forward.

At the close of trading on Thursday, December 22^nd,

Buy 2 SPY Jan (13^th) at-the-money calls

And Sell 2 SPY Jan (13^th) calls that are 15 points out of the money.

There is no stop for this trade, except for time. If the SPDR S&P 500 ETF Trust
SPY,
-2.29%
trades at the higher strike while the position is in place, then roll the entire spread up 15 points on each side. In any case, exit your spreads at the close of trading on Wednesday, January 4^th (the second trading day of the new year).

Follow-up action

All stops are mental closing stops unless otherwise noted.

We are using a “standard” rolling procedure for our SPY spreads: in any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread, or roll down in the case of a bear put spread. Stay in the same expiration, and keep the distance between the strikes the same unless otherwise recommended.

Long 2 SPY Jan (20^th) 375 puts and Short 2 Jan (20^th) 355 puts: this is our “core” bearish position. As long as SPX remains in a downtrend, we want to maintain a position here.

Long 1 SPY Jan (6^th) 408 call and short 1 SPY Jan (6^th) 423 call: this trade is based on the MVB buy signal, which was established on October 4^th. We have already rolled up a couple of times and taken some profit out of the position. Close the remaining spread now.

Long 2 KMB Jan (20^th) 135 calls: we rolled this position up last week. The closing stop remains at 135.

Long 2 IWM Jan (20^th) 185 at-the-money calls and Short 2 IWM Jan (20^th) 205 calls: this is our position based on the bullish seasonality between Thanksgiving and the second trading day of the new year. We will adjust this position if IWM rallies during the holding period, but initially there is no stop for the position, so the entire debit is at risk.

Long 2 PSX Jan (20^th) 105 puts: we intended to hold these puts as long as the weighted put-call ratio remains on a sell signal. However, the put-call ratio has rolled over to a buy signal, so exit these puts now.

Long 2 AJRD Jan (20^th) 52.5 calls: AJRD received an all-cash takeover offer of $56, so exit these calls now. Do not sell them below parity.

Long 1 SPY Jan (20^th) 402 call and Short 1 SPY Jan (20^th) 417 calls: this spread was bought at the close on December 13^th, when the latest VIX “spike peak” buy signal was generated. Stop yourself out if VIX subsequently closes above 25.84. Otherwise, we will hold for 22 trading days.

Long 1 SPY Jan (20^th) 389 put and Short 1 SPY Jan (20^th) 364 put: this was an addition to our “core” bearish position, established when SPX closed below 3900 on December 15^th. Stop yourself out of this spread if SPX closes above 3940.

Long 2 PCAR Feb (17^th) 97.20 puts: these puts were bought on December 20^th, when they finally traded at our buy limit. We will continue to hold these puts as long as the weighted put-call ratio is on a sell signal.

Send questions to: lmcmillan@optionstrategist.com.

Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of the best-selling book, Options as a Strategic Investment. www.optionstrategist.com

Disclaimer: ©McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information in this newsletter has been carefully compiled from sources believed to be reliable, but accuracy and completeness are not guaranteed. The officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may have positions in the securities recommended in the advisory.

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December 22, 2022
S&P 500, Nasdaq post worst day in month after strong data fuels worry about Fed rate hikes
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The S&P 500 and Nasdaq Composite indexes recorded their worst day in almost a month on Monday, after a hotter-than-expected U.S. services-sector reading fueled concerns that the Federal Reserve may need to be even more aggressive in its inflation battle.

How stocks traded
- The Dow Jones Industrial Average
  DJIA,
  -0.26%
  finished down 482.78 points, or 1.4%, at 33,947.10.
- The S&P 500
  SPX,
  -1.79%
  ended 72.86 points lower, or 1.8%, at 3,998.84.
- The Nasdaq Composite
  COMP,
  -11.01%
  closed down 221.56 points, or 1.9%, at 11,239.94.
- Those were the largest declines for the S&P 500 and Nasdaq Composite since Nov. 9, according to Dow Jones Market Data.
Stocks finished mixed on Friday, although they clinched gains last week, following a robust November jobs report, which stoked fears that inflation might not be so easily defeated.
What drove markets

Strong wage growth numbers released Friday were followed up on Monday by a robust reading for the U.S. services sector — both of which helped to stoke fears that the Fed’s interest-rate hikes, along with the central bank’s modest balance-sheet unwind, haven’t had much of an impact on the tight labor market.

The ISM barometer of U.S. business conditions in the service sector came in stronger than expected, rising to 56.5% in November, a healthy showing that signals the U.S. economy is still expanding at a steady pace.

“If nothing else, the ISM services report is being interpreted as very strong, and thus the economy is overheating and that means more Fed tightening,” said Will Compernolle, a senior economist at FHN Financial in New York. “Consumer resilience has proven to be more intense than I would have expected. In the two most interest-rate sensitive sectors — housing and autos — tightening has channeled into markets in meaningful ways.”

But there has been so much pent-up demand, that higher interest rates haven’t been cooling overall spending as much as the Fed would like because companies are still having to fill a backlog of orders, he said via phone.

In other economic data, the final November S&P Global U.S. services PMI edged up to 46.2 from 46.1, but remained in contractionary territory.

November jobs data released on Friday showed average hourly wages grew over the past year by more than 5% as of November, beating economists’ expectations and stoking concerns that robust wage growth would continue to fuel inflation, market strategists said.

Worries about a more-aggressive Fed also helped to drive Treasury yields higher, adding to the pressure on stocks. The yield on the 10-year note rose 9.6 basis points to 3.6% on Monday. Treasury yields move inversely to prices, and yields had fallen sharply over the past month, driven by shifting expectations about the pace of Fed rate hikes.

Monday’s ISM services figure “surprised to the upside, suggesting that the economy is still running above its long-run sustainable path and that the Fed is going to have to slow the economy more than expected in 2023,” Bill Adams, the Dallas-based chief economist for Comerica Inc. CMA, said via phone.

In other markets news, signs that China’s government is easing its COVID restrictions helped Hong Kong’s Hang Seng Index
HSI,
+4.51%
finish with a 4.5% gain.

See also: Chinese ADRs and casino operators rally on signs of easing COVID

Meanwhile, oil futures ended lower on Monday, a day after Sunday’s decision by OPEC and its allies to keep production quotas unchanged.

Falling equity prices helped drive the CBOE Volatility Index
VIX,
+8.87%,
also known as the VIX, back above 20 on Monday. The volatility gauge had fallen sharply in recent weeks as stocks rallied, potentially signaling complacency that could ultimately hurt stocks, said Jonathan Krinsky, chief market technician at BTIG, in a note to clients.

Companies in focus

Tesla Inc.
TSLA,
-6.37%
shares finished 6.4% lower after reports of a looming production cut at its factory in Shanghai, though the electric-vehicle manufacturer denied the reports.

GameStop Corp.‘s Class A shares
GME,
-7.12%
ended down by 7.1% ahead of the company’s third-quarter results, which are set to be released after the market closes on Wednesday. Analysts are looking for a narrowing loss from the videogame retailer.

Shares of U.S. airlines and aircraft makers traded higher on Monday, bucking the broader trend in stocks. Boeing Co.
BA,
+1.22%
and United Airlines Holdings Inc.
UAL,
+2.60%
were among the best performers in the S&P 500, finishing up by 1.2% and 2.6%, respectively.

Shares of Salesforce, Inc.
CRM,
-7.35%
ended down by 7.4% after the company confirmed its CEO Stewart Butterfield is leaving the company following Bret Taylor, the co-CEO, who departs at the end of January.

––Jamie Chisholm contributed reporting to this article.
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December 5, 2022
Is the market bottom in? 5 reasons U.S. stocks could continue to suffer heading into next year.

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With the S&P 500 holding above 4,000 and the CBOE Volatility Gauge, known as the “Vix” or Wall Street’s “fear gauge,”
VIX,
+0.74%
having fallen to one of its lowest levels of the year, many investors across Wall Street are beginning to wonder if the lows are finally in for stocks — especially now that the Federal Reserve has signaled a slower pace of interest rate hikes going forward.

But the fact remains: inflation is holding near four-decade highs and most economists expect the U.S. economy to slide into a recession next year.

The last six weeks have been kind to U.S. stocks. The S&P 500
SPX,
-0.03%
continued to climb after a stellar October for stocks, and as a result has been trading above its 200-day moving average for a couple of weeks now.

What’s more, after having led the market higher since mid-October, the Dow Jones Industrial Average
DJIA,
+0.23%
is on the cusp of exiting bear-market territory, having risen more than 19% from its late-September low.

Some analysts are worried that these recent successes could mean that U.S. stocks have become overbought. Independent analyst Helen Meisler made her case for this in a recent piece she wrote for CMC Markets.

“My estimation is that the market is slightly overbought on an intermediate-term basis, but could become fully overbought in early December,” Meisler said. And she’s hardly alone in anticipating that stocks might soon experience another pullback.

Morgan Stanley’s Mike Wilson, who has become one of Wall Street’s most closely followed analysts after anticipating this year’s bruising selloff, said earlier this week that he expects the S&P 500 will bottom around 3,000 during the first quarter of next year, resulting in a “terrific” buying opportunity.

With so much uncertainty plaguing the outlook for stocks, corporate profits, the economy and inflation, among other factors, here are a few things investors might want to parse before deciding whether an investable low in stocks has truly arrived, or not.

Dimming expectations around corporate profits could hurt stocks

Earlier this month, equity strategists at Goldman Sachs Group
GS,
+0.68%
and Bank of America Merrill Lynch
BAC,
+0.24%
warned that they expect corporate earnings growth to stagnate next year. While analysts and corporations have cut their profit guidance, many on Wall Street expect more cuts to come heading into next year, as Wilson and others have said.

This could put more downward pressure on stocks as corporate earnings growth has slowed, but still limped along, so far this year, thanks in large part to surging profits for U.S. oil and gas companies.

History suggests that stocks won’t bottom until the Fed cuts rates

One notable chart produced by analysts at Bank of America has made the rounds several times this year. It shows how over the past 70 years, U.S. stocks have tended not to bottom until after the Fed has cut interest-rates.

Typically, stocks don’t begin the long slog higher until after the Fed has squeezed in at least a few cuts, although during March 2020, the nadir of the COVID-19-inspired selloff coincided almost exactly with the Fed’s decision to slash rates back to zero and unleash massive monetary stimulus.

BANK OF AMERICA

Then again, history is no guarantee of future performance, as market strategists are fond of saying.

Fed’s benchmark policy rate could rise further than investors expect

Fed funds futures, which traders use to speculate on the path forward for the Fed funds rate, presently see interest-rates peaking in the middle of next year, with the first cut most likely arriving in the fourth quarter, according to the CME’s FedWatch tool.

However, with inflation still well above the Fed’s 2% target, it’s possible — perhaps even likely — that the central bank will need to keep interest rates higher for longer, inflicting more pain on stocks, said Mohannad Aama, a portfolio manager at Beam Capital.

“Everyone is expecting a cut in the second half of 2023,” Aama told MarketWatch. “However, ‘higher for longer’ will prove to be for the entire duration of 2023, which most folks haven’t modeled,” he said.

Higher interest rates for longer would be particularly bad news for growth stocks and the Nasdaq Composite
COMP,
-0.52%,
which outperformed during the era of rock-bottom interest rates, market strategists say.

But if inflation doesn’t swiftly recede, the Fed might have little choice but to persevere, as several senior Fed officials — including Chairman Jerome Powell — have said in their public comments. While markets celebrated modestly softer-than-expected readings on October inflation, Aama believes wage growth hasn’t peaked yet, which could keep pressure on prices, among other factors.

Earlier this month, a team of analysts at Bank of America shared a model with clients which showed that inflation might not substantially dissipate until 2024. According to the most recent Fed “dot plot” of interest rate forecasts, senior Fed policy makers expect rates will peak next year.

But the Fed’s own forecasts rarely pan out. This has been especially true in recent years. For example, the Fed backed off the last time it tried to materially raise interest rates after President Donald Trump lashed out at the central bank and ructions rattled the repo market. Ultimately, the advent of the COVID-19 pandemic inspired the central bank to slash rates back to the zero bound.

Bond market is still telegraphing a recession ahead

Hopes that the U.S. economy might avoid a punishing recession have certainly helped to bolster stocks, market analysts said, but in the bond market, an increasingly inverted Treasury yield curve is sending the exact opposite message.

The yield on the 2-year Treasury note
TMUBMUSD02Y,
4.479%
on Friday was trading more than 75 basis points higher than the 10-year note
TMUBMUSD10Y,
3.687%
at around its most inverted level in more than 40 years.

At this point, both the 2s/10s yield curve and 3m/10s yield curve have become substantially inverted. Inverted yield curves are seen as reliable recession indicators, with historical data showing that a 3m/10s inversion is even more effective at predicting looming downturns than the 2s/10s inversion.

With markets sending mixed messages, market strategists said investors should pay more attention to the bond market.

“It’s not a perfect indicator, but when stock and bond markets differ I tend to believe the bond market,” said Steve Sosnick, chief strategist at Interactive Brokers.

Ukraine remains a wild card

To be sure, it’s possible that a swift resolution to the war in Ukraine could send global stocks higher, as the conflict has disrupted the flow of critical commodities including crude oil, natural gas and wheat, helping to stoke inflation around the world.

But some have also imagined how continued success on the part of the Ukrainians could provoke an escalation by Russia, which could be very, very bad for markets, not to mention humanity. As Clocktower Group’s Marko Papic said: “I actually think the biggest risk to the market is that Ukraine continues to illustrate to the world just how capable it is. Further successes by Ukraine could then prompt a reaction by Russia that is non-conventional. This would be the biggest risk [for U.S. stocks],” Papic said in emailed comments to MarketWatch.

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November 25, 2022
Stocks are having a stellar October. Why the bear-market rally may have more room to run.

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An earlier version of this story misstated the date of the U.S. midterm elections. They will be held Nov. 8, not Nov. 9.

Despite a raft of risky events that investors must face down over the coming weeks, some on Wall Street believe that the latest bear-market rally in stocks has more room to run.

Although the S&P 500
SPX,
+1.50%,
Dow Jones Industrial Average
DJIA,
+0.97%
and Nasdaq Composite
COMP,
+16.23%
remain mired in bear markets, stocks have been bouncing back from the “oversold” levels when the major indexes fell to their lowest levels in two years. Bear markets are known for sharp bounces, such as the rebound that took the S&P 500 up more than 17% from its mid-June low before sliding back down to set a new 2022 low on Oct. 12.

With that said, here are a few things for investors to keep in mind.

There’s plenty of event risk facing markets

On top of a deluge of corporate earnings this week, including some of the biggest megacap tech stocks like Microsoft Corp.
MSFT,
+1.07%
and Amazom.com Inc.
AMZN,
+0.64%,
investors will also receive some key economic data reports over the next couple of weeks — including a reading from the Fed’s preferred inflation gauge on Friday, and the October jobs numbers, set to be released on Nov. 4.

Beyond that, there’s also the Fed’s next policy meeting that concludes on Nov. 2. The Fed is widely expected to hike interest rates by another 75 basis points, the fourth “jumbo” hike this year.

Midterm U.S. elections, which will determine which party controls the House and Senate in the U.S. are slated to take place Nov. 8.

Investors are still trying to parse the Fed’s latest messaging shift

Investors cheered what some market watchers described as a coordinated shift in messaging from the Fed last week, conveyed via an Oct. 21 report from The Wall Street Journal that indicated the size of a December Fed rate increase would be up for debate, along with comments from San Francisco Fed President Mary Daly.

Still, the Fed isn’t expected to materially pivot any time soon.

Because the fact remains: there’s plenty of froth that needs to be squeezed out of markets after nearly two years of extraordinary monetary and fiscal stimulus unleashed in the wake of the COVID-19 pandemic, according to Steve Sosnick, chief strategist at Interactive Brokers.

“It’s easier to inflate a bubble than to pop it, and I’m not using the term ‘bubble’ facetiously,” he said during a phone interview with MarketWatch.

Richard Farr, chief market strategist at Merion Capital Group, played down the impact of the Fed’s latest “coordinated” shift in guidance during an interview with MarketWatch, saying the impact on the terminal fed-funds rate is relatively immaterial.

Fed-funds futures traders anticipate the upper end of the central bank’s key target rate will rise to 5% before the end of the first quarter of next year, and remain there potentially into the fourth quarter, although an earlier cut wouldn’t be a complete surprise, according to the CME’s FedWatch tool.

Market technicians believe stocks might move a little higher

So far, October isn’t shaping up to be anything like September, when stocks fell 9.3% to polish off the worst first nine months of a calendar year in two decades.

Instead, the S&P 500 has already risen more than 5.5% since the start of October despite briefly crashing to its lowest intraday level in more than two years following the release of the September consumer-price index report earlier this month.

Read: ‘Bear killers’ and crashes: What investors need to know about October’s complicated stock-market history

Technical indicators suggest the S&P 500 can continue to build on last week’s gain, said Katie Stockton, a market strategist at Fairlead Strategies, in a note she shared with clients and MarketWatch.

According to her, the next key level to watch out for on the S&P 500 is north of 3,900, more than 100 points above where the index closed on Monday.

“Short-term momentum remains to the upside within the context of the year-to-date downtrend. Support near 3,505 was a natural staging ground for a relief rally, and initial resistance is near 3,914,” she said.

A key bear sees a tradeable opportunity

Mike Wilson, Morgan Stanley’s chief U.S. equity strategist and chief investment officer, has been one of Wall Street’s most outspoken bears for more than a year now.

But in a note to clients early this week, he reiterated that stocks were looking ripe for a bounce.

“Last week’s tactical bullish call was met with doubt from clients, which means there is still upside as we transition from Fire to Ice — falling inflation expectations can lead to lower rates and higher stock prices in the absence of capitulation from companies on 2023 EPS guidance,” Wilson said.

This earnings season is off to an good start

At this point, it’s safe to say that the third-quarter earnings season has vanquished fears that the Fed’s interest-rate hikes and gnawing inflation had already dramatically eroded profit margins, market strategists said.

The quality of earnings reported already has surpassed some of the early “whisper numbers” bandied about by traders and strategists, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

In aggregate, companies are reporting earnings 5.4% above expectations, according to data from Refinitiv shared with the media on Monday. This compares to a long-term average — since 1994 — of 4.1%.

However, when the energy sector is removed from the equation, expectations seem much more grim. The blended year-to-year earnings estimate for the third quarter is -3.6%, according to the Refinitiv data.

While investors are still waiting on earnings from roughly three-quarters of S&P 500 firms, according to FactSet data, some — like Morgan Stanley’s Wilson — are already looking toward next year as they expect the outlook for profits will darken substantially, possibly leading to an earnings recession — when corporate earnings shrink for two quarters in a row.

The outlook for the global economy remains dim

Speaking of energy, crude oil prices are flashing an ominous warning about expectations for the global economy.

“A lot of the weak oil reflects expectations that the global economy will be in recession and near recession,” said Steve Englander, global head of G-10 currency strategy at Standard Chartered.

West Texas Intermediate crude-oil futures
CLZ22,
+0.48%
settled lower on Monday, as lackluster import data from China and the end of the Communist Party’s leadership conference hinted at softening demand in the world’s second-largest oil consumer. Prices continued to decline early Tuesday.

Be wary of ‘fighting the Fed’

Investors remain worried that “something else might break” in markets, as MarketWatch reported over the weekend.

It’s possible that such fears inspired the Fed’s apparent guidance shift, Sosnick said. But the fact remains: anybody buying stocks while the Fed is aggressively tightening monetary policy should be prepared to tolerate losses, at least in the near term, he said.

“Simplest thing of all is: ‘don’t fight the Fed.’ If you’re trying to buy stocks now, what are you doing? It doesn’t mean you can’t buy stocks overall. But it means you’re fighting an uphill battle,” he said.

The VIX is signaling that investors expect a wild ride

Even as stocks extended their October rebound for another session on Monday, the Cboe Volatility Index
VIX,
-4.49%
remained conspicuously elevated, reflecting the notion that investors don’t anticipate the market’s wild ride will end any time soon.

The Wall Street “fear gauge” finished Monday’s session up 0.5% at 29.85 and it was trading just shy of the 30 level early Tuesday.

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October 25, 2022