S&P 500 -Take your side of the coin, for low volatility is not here to stay.

The recent, solid NFP numbers has seen equities leapfrog higher on the back of positive technical signals – holding above 200-day average support on increasing volume, new highs on sectoral level (technology) – hinting of a year end “santa” rally.

S&P 500

This certainly looks encouraging for equities in the short-term like I have previously highlighted on 30th August (Wild times indeed)

Short Extract below:

"Frankly speaking, whilst I would expect the recovery to extend for now, I am not a big fan of long equities on a macro perspective in the medium-term. I would watch topside levels on the S&P at 2100-2150 closely and look to fade any moves into this zone, either using a clear short on the index or by shorting VIX front end futures – depending on contango/backwardation."

Now that we have seen the expected recovery take place and as we appear to be approaching levels that would get me interested again, let us examine the following points.

  1. The past months have been choppy, mainly alternating between risk-on and risk-off phases, dominated by FED rate hike expectations.

2.Although it is now clear that a December rate hike is very much on the table, (73% priced in fed fund futures) unlike the DXY index and short end bond curves which have seen a thorough breakout from its ranges, S&P is currently diverging and remains stuck in this consolidation range.

3.Post-OPEC has also led to new cycle lows in both Brent/WTI, which should see oil crack lower, which should continue to put pressure on energy related sectors.

4.On the technical front, a rectangular range is seen with solid topside resistance from the all time highs at 2135 and pivot support coming in at 2015. RSI is coiling up in a triangular fashion, poised for a breakout in vol.

5.Small & mid cap indices (likes of Russell 2000) are no where near all-time highs, still very much capped by resistance from the break lower since the August selloff – hints to me that this rally in S&P is by no means a clear cut full risk on type of move.

Take your pick of the coin, for low volatility is not here to stay.

It should be obvious now that, we are heading into year-end, and markets are priced for typical low volatility based on seasonality. However, with the S&P still sandwiched between its range, FED catalyst still live, a breakout could be potentially rewarding.

I have chosen the bearish side of the coin, looking to fade moves towards the 2135 region by going long January VIX futures. In my opinion, it looks reasonably cheap at the moment, great long here either for a hedge ( if you are innately long equities via stock holdings) or for pure speculative purposes, hoping the world will blow up. Either way, I am perfectly happy to pay for theta decay over the next 2 months, for a nice surprise payout.

Comments/feedback welcome.

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