VIX has gone flat the last four weeks, even as the S&P 500 is posting newer highs. Yes, large-cap indices scored important breakouts four weeks ago, but meaningfully building on it is proving difficult. The S&P 500’s earnings yield is now less than the 10-year T-yield.
 

On 23 June, VIX tagged 22.51 intraday and faced strong resistance at its 50-day moving average; in the next session, it gapped down to also lose the 200-day. A few days later – on the 27^th – the S&P 500 took out its prior high of 6147 from 19 February, before going on to rally another 2.7 percent. One would think VIX would be trading with a 14 handle by now, but not quite.

After that, the lowest intraday print on the volatility index was 15.70 on 10 July, with 16 reliably providing support. In the last four weeks, VIX respectively closed at 16.41, 16.40, 16.38 and 16.32. This follows a loss of a rising trendline from last July, but that breach has not resulted in sustained downward pressure on volatility (Chart 1).
 

Large-cap indices, in the meantime, are attracting bids even in the face of rising rates. The 10-year treasury yield went from 4.21 percent intraday on 1 July to last Thursday’s high of 4.49 percent. In the right circumstances for bond bears, the 10-year would have had a shot at 4.7 percent, which is where a falling trendline from October 2023 when rates peaked at five percent lies. But for now, yields are probably headed lower; in each of the three sessions through last Thursday, the 10-year ticked 4.49 percent intraday, finishing the week at 4.43 percent.

The 10-year has been trending higher particularly since last September when rates were 3.60 percent – or April 2023 when they were 3.25 percent. As the 10-year yield firmed up, it began to compete very well with the S&P 500’s earnings yield, which is essentially the inverse of the price-to-earnings ratio.

At the end of the June quarter, for instance, 10-year notes were yielding 4.23 percent, versus the S&P 500 earnings yield of 3.87 percent. Historically, earnings yield has tended to outstrip the 10-year yield, sometimes substantially. The situation has reversed in recent quarters, with the 10-year yield higher than the earnings yield in five of the last six quarters (Chart 2).
 

The recent role reversal between the 10-year yield and the S&P 500 earnings yield shows the persistently rising multiples accorded to stocks. This raises mid- to long-term risks; near-term is anyone’s guess. The large cap index indeed has gone from 4835 on 7 April to last Friday’s fresh all-time high of 6316.

The rally since April’s low has resulted in several breakouts, one of which occurred four weeks ago at 6100s (Chart 3). In recent sessions, bids have appeared at/around 6200, while 6300 has attracted selling. A breach of 6200, which is looking likely as subtle signs of fatigue are showing up, would mean the index would have breached shorter-term moving averages. In this scenario, bulls will then get an opportunity to defend 6100s and prove that the breakout was just not a fluke.
 

A similar breakout retest on the Nasdaq 100 takes place at 22100s, which goes back to last December and which it bolted out of four weeks ago (Chart 4). Last week, the tech-heavy index closed at 23065.

Since that breakout last month, the Nasdaq 100 has continued to lumber higher, probably pricing in good numbers from Big Tech. Google parent Alphabet (GOOG) and Tesla (TSLA) are scheduled to report their June quarter on Wednesday. Next week is heavier, as Microsoft (MSFT) and Facebook parent Meta (META) report on the 30^th, while Apple (AAPL) and Amazon (AMZN) are due out on the 31^st. Nvidia (NVDA) does not report until August 27^th as it is on a July quarter.

The earnings bar relatively is low, and stocks have moved up nicely going into this, raising the possibility of a sell-the-news phenomenon post-earnings. In this scenario, there is short-term horizontal support at 22900s.
 

The Russel 2000 similarly sits at a crucial juncture. The small cap index rallied from an intraday low of 1733 on 9 April to 2276 on the 10^th this month. Last Friday, it ticked 2270 intraday before closing at 2240. There is massive resistance at 2300, and it is holding.

Since April, the index has pretty much rallied all along a rising trendline from that low (Chart 5). It is clinging on to that support for now, but breach risks are rising. Last week’s weekly spinning top followed the prior week’s long-legged doji. Should small-cap bulls not be able to take out 2300 soon – not very likely – a trendline break will soon follow, and that could mean a test in due course of major support at 2100.

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