Stocks Rebound, But Bond And Volatility Indicators Urge Caution
Stocks managed a snapback rally on Monday, recovering from Friday’s sharp sell-off. Numerous technical indicators have triggered, suggesting more downside likely lies ahead—but if fundamentals haven’t mattered, perhaps technicals are losing their relevance now, too.
Typically, a break below major support and trend lines on heavy volume is a bearish signal. Notably, today’s rally occurred on roughly half of Friday’s volume.
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The 10-year wasn’t feeling any better today about the economy than it did on Friday, dipping another 2 bps to close at 3.18%.
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Judging by the dollar’s performance against the yen today, it doesn’t seem like any minds were changed there, either.
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The economically sensitive areas of the market and those influenced by Fed policy clearly didn’t feel any better today, so why the rally in stocks? Most likely it was driven by the pullback in volatility, which surged significantly on Friday—making today’s correction hardly surprising. Whether the VIX slips back below 16 is debatable. We’re no longer in a strong “vol supply” period, especially as earnings season winds down and both 10- and 21-day realized volatilities trend higher. It seems unlikely, but markets have a way of surprising everyone.
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The MOVE index, a measure of bond market volatility, rose for a second consecutive day. Although it’s been generally trending lower since early April, when the Fed kicked off this rate cycle in February 2022, the index has rarely dipped—and more importantly, stayed—below 88 for long. This makes the MOVE index an important indicator to watch: if it starts climbing again, the VIX is likely to follow.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. ...
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