VIX index closed at 10.04 marking the sixth lowest weekly close ever. In fact, as Charlie Bilello points out, 7 out of 20 lowest VIX index weekly closes have occurred in 2017.
Low volatility has been a persistent theme since July of 2016 and shorting vol resulted in a tremendous trade over the past twelve months. SVXY has more than quadrupled since Brexit lows.
The continuation of this trend depends on where the overall market is headed and whether non-market related exogenous events will have any effects going forward. So far, the primary theme has been improving earnings, which in conjunction with low bond yields have created a perfect environment for stocks to move higher in a slow measured pace.
My approach has always been about simplicity. I look at general global macro picture, US bond yields, market internals, and sentiment. Internals have been gradually deteriorating since March as energy, telecom, REITs, retail, and to a certain degree financials have stalled or in certain cases broken down. Global macro has been mostly neutral to positive with US data coming a bit weaker than expected lately.
Sentiment continues to be neutral to bearish, which is a positive sign, whereas bond yields justify current forward valuations for equity markets. Thus, all in all the picture is mostly neutral and that’s how US markets have been trending over the past three-four months with the exception of a few large-cap tech names, which have relatively been much stronger.
This past week biotechs broke out of a range to the upside and transports may break out to all-time highs given the weekly chart pattern resembling a small cup and handle. My current worry primarily centers around NYSE internals, as the percentage of stocks above 50 and 200 day moving average and $BPNYA show divergence while indices are hitting new highs. That’s a worrisome development, however, calling a top is a fool’s errand and I’m not prepared to do based solely on those two indicators. It’s quite possible that weak performing sectors will play catch-up as sector rotation takes place and new market leaders may drive indices higher.
Cumulative advance-decline line remains healthy, biotechs pushed $BPCOMPQ significantly higher and we are about to enter a strong Q2 earnings season. Taking into account all the factors I’ve listed in conjunction with low summer trading volumes odds favor continuation of the current grind higher for US equities.
Typically, I would trade such a market forecast by shorting vol through XIV or SVXY, however, with 30-day synthetic below 12 even minor 1-3% S&P 500 corrections will have an outsized effect on those securities.
Therefore, I decided to close the majority of short vol positions and focus more on individual securities as a way to participate in the ongoing rally. Implied vol of call options for most securities are low enough to justify outright purchases. I am keeping significant levels of cash to deploy when other opportunities present themselves.
My security selection has so far been rather mixed, however, account performance continues to be quite positive and I ended last week at the highest level for 2017.
Account performance YTD