While some in the financial media claim the Federal Reserve turned hawkish last week, others thinking they just turned a bit less accommodative were right until Friday when the S&P 500 Index declined 55.41 points while the yield on the 10-Year Treasury Note declined 7 basis points to end the week at 1.45%. The Market Review below has more details along with an earnings calendar spread idea for Micron Technology, Inc. (MU).

S&P 500 Index (SPX) 4166.45 dropped 80.99 points or -1.91% last week with most of the decline happening on Friday as it closed below both the operative upward sloping trendline that began at the October 30 low and the 50-day Moving average at 4181.59. Any further decline early in the week could result in a test of support around 4050 near the May 12 low that seems likely.

Invesco QQQ Trust (QQQ) 342.63 added 1.39 points or +.41% last week holding up relatively well on Friday declining2.71 points or -.78% since lower interest rates provides some support for growth stocks even as the broad market declines. The 50-day Moving Average down at 3334.57 should provide support next week with the yield on the 10-Year Treasury Note ending Friday at 1.45%.

CBOE Volatility Index (VIX) spiked up Friday to end at 20.70, up 32.57%. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, added 4.64 points or +42.76% ending at 15.49% after declining to a 52-week low at 10.85% on June 11.

Since implied volatility has a tendency to revert to the mean of its relevant range it's possible to estimate the range visually by looking at the volatility chart. The two-year chart below shows implied volatility in a range between 10% and 20% before the Covid decline. The after spiking up to near 80% it settled back down around 20% on June 5, 2020, marked with the green circle on the chart. Using this date as the starting point the mean is now 17.93%. Should the S&P 500 Index continue lower the IVXM would likely reach and possibly spike above the mean. In February, for example, it spiked up to 27.5% before returning near 17.5%. Think of it like the pressure gage on a steam boiler. The pressure builds, blows off, and then returns to the normal operating range.

The six-month chart focuses on the February and May spikes. 

VIX Futures Premium 

VIX futures premium last Friday ended at 4.45%, in the lower half of the yellow caution zone with July futures now the front-month vs. week ending June 11 at 14.03%, in the green bull zone. Apparently, the contrarian bears see an opportunity.

Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds. The chart reflects the distance from the VIX to the futures curve computed from the two front month contracts. 

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, reflects the sudden change of sentiment by turning lower last Wednesday and then accelerating to the downside by declining 73.52 points or -8.72% to end the week at 769.13. Occasionally it leads pullbacks, but this time the concurrent decline confirms the market decline underway.

Best Calendar Spread 

“The Best Calendar Spread", a regular feature in the Rankers & Scanners section of our home page offers suggestions from our Spread Scanner automatically set to search for long call calendar spreads by scanning for differentials between the near term implied volatility compared to the deferred month implied volatility. At this point, they are untouched by human hands. Calendar Spreads are problematic since in many cases the higher implied volatility is well justified by events underway making the near-term options priced correctly. Use the suggestions as a starting point and then see if the idea has merit based upon the fundamentals and other criteria.

Friday's Best Calendar Spread

Micron Technology, Inc. (MU) manufactures DRAMs, NAND flash memory, CMOS image sensors, other semiconductor components, and memory modules used in leading-edge computing, consumer, networking, and mobile products. 

Buy Oct 15 82.50 calls 4.85  IV 39.60  (117 days).

Sell July 2 82.50 calls 1.02   IV 49.82  (12 days).

Note the implied volatility differential buying 39.60 and selling 49.82.

Friday's option volume was 331,483 contracts with a five-day average of 159,210.

With an Implied Volatility Index Mean, IVXM of 40.43, and with an IV/PHV ratio using the range method to calculated historical volatility of 1.27, the risk of a large harmful move in the stock when it reports is low, but check it again at the close on June 29, the day before it report 3Q earnings on June 30 after the market close. The higher the ratio, the greater the risk.

Strategy

In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

Some in the media characterized Federal Reserve Chairman Jerome Powell's comments as hawkish, meaning interest rates may rise sooner than previously expected. Hawkish seems extreme while less accommodative seems a better fit.

Powell said near-term discussions are about asset purchases [balance sheet], not rate hike liftoff. When they decide to reduce monthly buying of $80 bn in Treasuries and $40 bn in MBS they will give notice well in advance so markets can begin adjusting and perhaps that what James Bullard President of the St. Louis Federal Reserve Bank began doing on Friday. So they are talking about tapering and remember the Fed's tool bag includes jawboning.

Bullard's comment that he expects the central bank to raise its benchmark interest rate in 2022 given his forecast for above-target inflation set off the market decline on Friday. However, three other factors could also be involved including monthly June options expiration, a seasonal June pullback before 2Q earnings reporting begins and a cyclical pullback after making new highs last Monday and Tuesday.

Since a pullback of an unknown degree began on Friday, consider opening hedges using SPX or SPY put spreads or collars on overextended cyclical stocks. Consider it insurance against a more harmful correction.

Summary

Last week the bullish tone of the equity market quickly disappeared after James Bullard President of the St. Louis Federal Reserve Bank added his views to Wednesday's earlier comments from Fed Chairman Jerome Powell that hardly moved the markets. After making new highs on both Monday and Tuesday, by Friday the S&P 500 Index closed below both the operative upward sloping trend line and the 50-day Moving Average. Although implied volatility turned higher it didn't spike up, but both the VIX futures premium and market breadth turned more cautious suggesting opening put spreads and collars.