The Lollapalooza line-up was announced last week to the cheers and jeers of music fans not only in Chicago, but around the globe. One name that caught my eye was the inclusion of Jack White and his new band; aptly named “Jack White.” As I sit at my station and watch this market gyrate around the past couple of weeks, I can’t help but think of the White Stripes song “Little Ghost.” The open lines are: “Little ghost, little ghost. One I’m scared of the most.”
As I evaluate the latest market moves. I find myself asking the questions: Is this the ghost of Aprils past coming back to haunt the market? Or is this just a little house-cleaning stirring up some dust that will allow for the additional growth as we move into the summer months? I suppose the bigger question is “Will the dust create the perception that this ghost does in fact exist, leading to its own reality?” Hmm.
As we ponder these questions, I can tell you Stutland Volatility Group did point out in our previous commentary that there were some haunting signals emerging from our technical analysis. Additionally, the psychological mindset of the market players led us to protect against the increased probability of a volatility spike.
During the previous two years, April has proved to be the top for the market for several months, and, in last year’s case, the high for the year. Interestingly, the CBOE Market Volatility Index (VIX) found its closing low point of the year in both April 2010 and 2011.
Click to EnlargeIt would appear traders and market participants believe they are seeing signs of these ghosts reappearing and trying to protect themselves from further harm. The VIX has found new life and briefly popped above 20 a couple of times in the past week. VIX futures have been firming as well. All of the VIX futures are trading over 20, with the September future trading as high as 26.30 late last week.
There are legitimate reasons for these visions to be ultimately proved true. Historical volatility has been on a steady rise over the past couple of weeks. According to iVolatility.com, SPX 10-day historical volatility has surpassed implied volatility. This has not been the case in previous months. The economic recovery appears to be waning and the Fed minutes have shown the Open Market Committee has become less accommodative to further government liquidity programs.
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Technically, the S&P 500 Index (SPX) has suffered some short-term damage; however, SPX has not yet breached $1355, which is a point of much concern to technical traders. This is viewed as a pivot point that would indicate the recent rally has failed. The SPX has been dangerously close, but has thus far been able to hold above this level.
It can also be pointed out that the SPX is once again resting on its 50-day moving average at 1376.92. The NASDAQ-100 Composite (COMP) is resting on its respective 50-day moving average; however, the Dow Jones Industrial Average (DJIA) has broken below its 50-day moving average. In general, most of the major averages are struggling to maintain the upward momentum.
For the first time this year, the market headwinds are testing the strength of their engine. The economy appears to be reaching a plateau, which has caused some concern as to the viability of current market valuations. As stated above, short-term realized volatility has surpassed implied volatility in the SPX. Market fundamentals coupled with technical observations appear to be creating the illusion that the market could be headed lower.
We are not sure if the April ghost will reappear; however, with the SPX up 9.5% year-to-date, Stutland Volatility Group feels this is a period to reduce market risk. This type of price action has us reining in volatility exposure.