Weekly State Of The Market: Segment 2

The major averages succumbed to modest selling pressure Thursday, but rebounded on Friday as the S&P 500 (SPX) looks ever-closer to achieve 2,800. This with headlines and media coverage surrounding U.S./China that support a forthcoming deal.  Please click the following link to review the SOTM video, which is roughly one hour in duration.


Outline of SOTM

  • Introduction and discussion on the state of volatility. Reviewing VIX Futures Term Structure with modest contango near 4%. Defining roll yield value (m1-spot VIX = roll yield) The higher the roll yield the better for shorting volatility.  Too much time until m1 expires to make any declarations on what will happen in the volatility complex between today and m1 expiration. Introduction to CBOE to see daily change of individual VIX futures contracts. (0-15 minutes in)

  • Discussion on the FOMC minutes, permabears blame the Fed for everything that has benefited the nine-year long bull market. FOMC minutes showed committee members will remain patient, but they indicated market volatility and asset price volatility played a role in their decision to pause future rate hikes. (15-18 minutes in)

  • Fed's balance sheet and FOMC minutes discussed the possibility of ending the balance sheet reduction/QT by the end of 2019. Below is picture of the QT/balance sheet reduction over the last year. The Fed always follows the market and responds to the market because the market is a representation of the economy and vice versa. (18-27 minutes)

  • The Fed made a policy error in hiking 2 times while CPI and PCE indicated deflationary conditions. China is  likely to stimulate their economy by stablizing the yuan and cutting rates. A U.S./China trade deal likely to include removal of tariffs. (28-36 minutes)

  • Disconnect in certain market correlations. Bond prices and equity markets have both moved higher lately, yields lower. 10-2yr yield spreads have remained very flat for a while now. Pay attention to some of the disconnects in the market correlations. (36-40 minutes in)
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