Perils Of Easy Money

Last Thursday's interest rate jolt made one thing clear, more easy money will ignite inflation fears and equities are not taking higher interest rates kindly, especially those with high price-to-earnings and high price-to-sales ratios with long duration. While interest rates on the 10-Year Treasury Note have been gradually trending higher since last October, the 16 bps jump on Thursday, after an auction for 7-Year Notes showed poor demand, caused bond traders to scurry for the exit. Suddenly the frog in boiling water realized it was in trouble. More details follow the Market Review along with a mark-to-market update for last weeks' Energy Select Sector SPDR Fund (XLF)  
spread idea.

S&P 500 Index (SPX) 3811.05 dropped 95.56 points or -2.46% last week after bouncing off support at the 50-day Moving Average on Wednesday only to get whacked Thursday by the interest rate news. Bulls will point out it managed to close Friday slightly above the 50-day Moving Average now at 3808.40. Should it continue lower this week it should find support in the zone between 3750 and 3700. So far, this pullback looks a lot like the one that ended February 1, when compared to standard RSI and MACD indicators. On Jan 29, it traded below the 50-day Moving Average and then recovered the next day. Friday it again traded below the 50-day before closing just above it.

iShares Russell 2000 ETF (IWM) 218.31 lost another 6.88 points or -3.06% last week underperforming SPX by a good margin. However, unlike the SPX it's still above the 50-day Moving Average now 210.95. Since market breadth continues deteriorating it lost the "decider" title last week to SPX.

CBOE Volatility Index® (VIX) 27.95 jumped up 5.90 points or +26.76 last week. 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 5.22 points or +31.11% ending the week at 22.00%. From the volatility chart below, expect spikes up near 30% on pullbacks. However, spikes up above the November high around 32% would begin ringing warning bells.

1 2 3
View single page >> |

Disclaimer: is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.