Things Are Not Well, Even After TWO Flinches

Today was interesting. We saw a pop, then drop, then a steady march higher toward the day’s starting point, before settling up close to 1% for the S&P 500 index.

So while it seemed like it was more or less a nothingburger kind of day, I would say that in my mind it was very constructive. We didn’t fade far below the day’s lows.  

The range on the day was low compared to what we’ve been seeing of late. Note that intraday volatility has been exceptionally high of late - the highest we’ve seen since the 2008 GFC. This is supportive of a VIX 45.

Investors had begun to believe that a stock “put” didn’t exist at ANY level. By “put”, I mean a level at which the central bank won’t tolerate more market losses and intervene with some more support.

But President Trump flinched last week. Not once, but twice.

Bond markets spooked his crew, so he delayed tariffs for most of the world. Problem #1 solved:  a credit/rate volatility contagion was averted.

And while the stock put did not technically materialize the bond put did all the heavy lifting for equities.  

Save the bond market, save the stock market.  

Second, he quietly excluded a number of items from the tariff escalation list late on Friday: cell phones and semiconductors in particular.

And while Secretary Lutnick dialed that claim back somewhat, I think the market has been reconsidering expectations of all-out chaos. The Average True Range – a measure of daily market highs and lows – has been slowly turning down, which is a sign of easing worries:

Remember, direction of volatility is important, not just absolute levels. An ATR that is pointing down is what we like to see for premium harvesting.

So, while I think we are far from out-of-the-woods, a relaxation of fear is welcome. That’s a return of stability, one of the key features we look for in income trading.   

Let’s hope for more of that.

May the income be with you,

Hans