After last week’s dramatic declines in the US and global equity indexes, the markets have been able to achieve upward momentum two sessions in a row. As we stated yesterday, it is unlikely that federal regulators will stand by and watch the markets if they were to continue to decline. At the very least, after so many years of QE globally, it would be unusual for them to abandon a policy that they used to clearly strong effect over the last 8 plus years. That is to say, when given the option of stepping in or stepping aside, political pressure would most likely lead them to step in and repeat the process of propping up the markets. However, so far as we know, they have mostly stepped aside at this time and plan to continue to do so. Thus, the lesson for the US markets at least is simple: it’s time for it to stand on its own feet.
Yesterday’s action was clearly bullish. When looking at the volume of buy orders versus sell orders for stocks on the NYSE, it was clear that cumulative buying volume exceeded selling by by a clear margin. This was the case throughout most of the day. However, it would be somewhat misleading to suggest that this is the end of the story. Instead, it seems more plausible that the markets are simply settling into range bound trading. The SPY etf, for example, appears to be settling into a range very accurately represented by the range between yesterday’s high of 267.01 and Friday’s close of 261.50. Other indexes are likely to mimic action on the SPY as the markets attempt to stabilize.
At this juncture, it does appear that the markets have finished the extreme price volatility levels demonstrated last week. However, options volatility levels continue to be high and the VIX index is currently at levels substantially higher than the amount of volatility demonstrated by the markets over the past week. This is likely due to the large number of short volatility trades that have to be unwound after last Monday’s debacle. Let’s keep an eye on the VIX and SPX options implied volatility levels to see if and when trading is returning back to more normal levels of volatility, with the hope that we do not go back to the extremely low volatility we saw in 2017.