Day Hagan Tech Talk: Enjoy the Whine
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Summary
Much of the focus this week will be on what I call the noise: the Fed’s focus on inflation (May 3 interest rate announcement), additional economic reports capped off Friday by the April jobs report, and AAPL’s EPS report Thursday. Enjoy the whine—increased volatility in equities and interest rates.
Volatility: Fixed Income and Equities
There is always debate about the best way to measure fear and complacency in the fixed income and equity markets. Two tools are the ICE MOVE Index (MOVE) & the CBOE Volatility Index (VIX). MOVE measures fear in the bond market, the uncertainty about interest rates. The VIX measures, in theory, fear and complacency related to equities. Both look at one-month and realized volatility.
Why is it important to follow these indices? Stockcharts says it best:
The bond market is a much larger behemoth compared to the stock market. It includes corporate, government, domestic, and foreign debt securities. The bond market is the backbone of the financial system. While bonds are generally not volatile, they can be, especially when there's a change in interest rates. Given that interest rate changes are front and center in investors' minds, what happens in the bond market can be an earlier signal of volatility than in the stock market.
Currently, the MOVE and VIX are down near support (Figures 1 and 2) and could easily reverse higher on any given news release. A reversal up would suggest a likely increase in volatility.
Figure 1: ICE Move Index. | Near support and momentum is close to crossing higher—see thumbnail chart. Given the coming news (see summary), the odds favor a pickup in volatility starting this week.
Figure 2: Volatility Index. | Near support and close to oversold level (not shown). A reversal up above 19+/- would likely start the process of increasing equity market volatility to the downside. As is the case with MOVE, please don’t anticipate a reversal. Wait for it to occur.
Figure 3: S&P 500 daily. | Not sure who doesn’t see resistance between 4195 and 4218. Don’t be surprised by a violation of resistance and immediate pullback, or simply a pullback first.
You’re Killin’ Me, Smalls (& More Whining)
“You're killin’ me, Smalls” is from the 1993 movie The Sandlot, about a boy named Scotty Smalls who is taken under the wing of the local boys in his new neighborhood and taught to play baseball. The phrase is a general expression of exasperation with someone or something.
There are not many, if any, areas on Wall Street that conjure such frustration or disdain as the lack of relative performance exhibited by Small Caps versus Large Caps. This relationship, plus that of Microcaps, is where we want to remain focused—look to capture Alpha. Both areas are heavily influenced by interest rates, the economy, and financial conditions. Ned Davis Research wrote the following, which may help put this (Small and Micro relative to Large) into context:
In the wake of the regional banking crisis, investors have avoided any stocks that may need to access the capital markets in the next few years. Small-caps are more likely than large-caps to need capital, and many of the most vulnerable banks are classified as small-caps. The Russell 2000/1000 ratio… has so far failed to reestablish an uptrend.
Figure 4: Small Cap and Microcap proxy versus Large Cap proxy (SPX). | Patience. Don’t anticipate. When our models in this space reverse, we will act. Not beforehand.
The Day Hagan/Ned Davis Research Smart Sector strategies utilize measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, unemotional, rational decisions about how much capital to place at risk, as well as where to place that capital. Please reach out for specifics.
Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know how we can further support you.
Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 5.01.2023. Chart and table source: Stockcharts.com unless otherwise noted.
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